It's been an interesting year for the stock market. What broader lessons can be drawn from a few investing headlines this year?
Investing lesson No. 1: "Facebook IPO: What the %$#! Happened?" from CNN Money, May 23:
Facebook's breathlessly hyped IPO on Friday has turned into a huge Wall Street debacle, with lots of confusion -- and now, lawsuits -- swirling around.
Back in May, social media behemoth Facebook took the world by storm when it belly-flopped out of private ownership and into public hands. The IPO was priced at $38, opened at $42 on the first day of trading and it was all downhill from there.
Monday, Dec. 3, it closed at $27.04.
What we can learn: Initial public offerings, or IPOs, hold so much promise for so many, but often they're just a disappointing flop. Case in point, Facebook was the hot IPO of the year but failed to deliver in the moments and months following its debut. Not only was the stock thought to be overvalued but the actual trading was bedeviled by technical glitches and confusion.
Sure, there's nothing wrong with getting in on the ground floor of a good company, but why do it in the frenzied trading of the first day? As likely as not, you'll be able to buy it at a better price after the hype dies.
"'Just Say No' is no longer a slogan to help junior high kids avoid drugs, but also one for investors to abstain from IPOs like Facebook," says Robert Laura, president of Synergos Financial Group in Brighton, Mich.
Hopping into the fray in the tumult of the early days following an IPO rarely turns into a big payday for retail investors. Consider Amazon: It went public in May 1997. On the first day of trading, it opened at $23.62. By the same time next year, the stock's price had nearly quadrupled. During the course of the year, there was plenty of time for an intrepid stock investor to get in. Amazon's stock closed at $250.33 Monday.
Investing lesson No. 2: "Stock markets seem to be in lock step" from Kiplinger, February 2012:
When the market tanks nowadays, just about all stocks go down in unison. And that high degree of correlation isn't limited to U.S. stocks. Stock markets around the world now seem joined at the hip -- a bad day in Asia rolls over into losses in Europe and further declines in the U.S.
This phenomenon cuts across all asset classes. When stocks plunge, the prices of commodities -- particularly oil, and even gold -- are likely to head lower.
What we can learn: Asset class correlations and "risk on/risk off" trading patterns were notable in 2011, and that trend continued through this year.
Even though the stock market has had a relatively good year, it's been a bumpy ride. These days, as ever, it's important to have an investing plan and understand your investments in order to stick with that plan.
"Be crystal clear and document risk tolerance and use investment policy statements. This helps ensure both clients and rep understand and agree on perceived risk in a portfolio. I don't want clients getting surprised when the market moves in either direction. And 2012 had both up and down markets. If risk tolerance is vague, clients don't know what to expect and that can pose a problem," says Peter Donohoe, CFP professional, a wealth management specialist with PRW Wealth Management in Quincy, Mass.
"I don't know that anyone ever expects a 40 percent drop in equities, but it's something you have to be prepared for," Donohoe says.
Investing lesson No. 3: "Fed to savers: Suck it up" from Bankrate, Oct. 8
In an Oct. 1 speech at the Economic Club of Indiana in Indianapolis, Federal Reserve Chairman Ben Bernanke acknowledged the pain for savers and investors, saying he and his colleagues were aware of this situation.
Rather than offer any real hope of relief, he went on to say that the current low rates are "in a larger sense the result of the recent financial crisis." That seems to suggest the Fed is not responsible.
What we can learn: Mindbogglingly low interest rates have thrown a serious wrinkle into the investing and savings plans of millions of retirees and pre-retirees. As a result, savers with a need for income have been pushed into riskier investments. That pushing hasn't stopped either. The Fed has vowed to keep rates targeted between zero percent and 0.25 percent until 2015. A basis point is one-hundredth of 1 percentage point.
"Retirees … are being forced to take on more risk that they may not be aware of through variable or index annuities, stock market linked CDs, bond funds and other high yield investments. Right now, many of these other options may be able to produce more income than CDs, but they can come with much higher costs, potential for losses and longer lock-up periods," says Laura.
The only options for savers are to accept terrible CD rates or become a bit of an expert in investment products. Hopefully they're already retired because that can be a full-time job.
What lessons have you learned this year?
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