Business

Don’s Diatribe: The Facebook IPO and the Small Investor

How to make smart small investments

Wow! What a difference a week makes. What was once a highly anticipated initial public offering (IPO) has quickly became a public relations and legal nightmare. Facebook’s less-than-stellar IPO has been tough on the small investor. While regulators, investigators, and lawyers point fingers, individual investors try to recoup their losses. Some estimates report losses for small investors to be in the range of $600 million. (Ouch!)

So how can you make sure that your money stays just that, your money?  Here are a few tips to keep mind when investing those hard-earned dollars:

1) Educate yourself.  As a small investor, you might not have access to the same kind of stock information as a big investor. You’ll have to do your homework. Specifically, familiarize yourself with the industry, learn the lingo, watch the financial news channels, and read every book and magazine on investing that you can get your hands on. Also, ask around. See what others are doing with their investment dollars.

2) Don’t spend what you can’t afford to lose. The Facebook situation illustrates the one sure-fire rule of investing: nothing is a sure thing. The lesson in that is don’t spend your lunch money, or rent money for that matter. Don’t gamble your retirement savings or your children’s college fund. Without risk there can be no reward, but make sure that that risk is within your acceptable standards.

3) Be in it for the long haul. Your money needs to be invested for certain length of time, say six months at least, to have any kind of opportunity to do anything real. Regard time as an ally. Even a small investment of $25 a month can pay off through the magic of time and compounding interest.

4) Broaden your investment horizons. Diversify your investment portfolio. Purchase different types of stocks (technology, health care, financial services, etc.). Having your money spread out among different types of investment options can protect you from a big loss. In other words, don’t put all your investment eggs in one basket. 

5) Go with the ol’ standbys: savings and money markets accounts, CDs, and government bonds. If the risk associated with stock market investing is not your thing, go with more established investment options. For generations, saving accounts have been considered safe and convenient investment options because they offer minimal risk. A money market account is like a savings account except that it offers a higher interest rate but has more restrictions on accessing those funds. CDs pay a higher interest rate than savings or money market accounts, but you are committing your funds for a set period of time and may be penalized for early withdrawal. Government savings bonds are still a safe and secure investment.

Stock market investing will always be risky. How much of that risk you can tolerate is up to you. The Facebook situation aside, the stock market is a good investment, but one has to be smart about it. As a small investor, investing your time and effort before your money will pay lots of dividends in the future.

 Donald R. Simon, J.D./LL.M., is president and CEO of Simon Business Consulting, Inc., a firm providing consulting services such as business and marketing plan development, incorporations, intellectual property advising, franchising regulatory assistance, and presentations on the basics of starting a small business.  Send questions or comments to don@simonbizconsulting.com.  This blog is provided as a source of information and is not to be construed as legal advice or opinion, or to form an attorney-client relationship.  For legal advice, please consult an attorney.