Facebook and Other IPOs: Do not Buy the Hype

The disproportionate share of attention garnered by the Facebook IPO — as well as all the hand-wringing by many in the investment community about the drop in the share price — actually points to a common mistake made by many investors: Focusing too heavily on the short-term performance of an investment.

When considering purchasing an investment, many experts recommend looking well beyond whether its value will rise or fall in the short term — for example, in days, weeks or even months. Instead, investing should be done with a long-term perspective, with the goal of creating wealth and generating income years into the future.

Keep Emotions Out of Investing

One of the keys to keeping a long-term perspective on investing is to try to separate your emotions from the investing process. And one of the best ways to do this is to avoid getting caught up in the media hype that surrounds events like the Facebook IPO or sudden and drastic rises or falls in the stock market on a daily basis.

Interestingly, research cited by Jason Zweig in his book Your Money and Your Brain attests that human beings’ brains are actually hard-wired to lead us to make poor investment choices. That’s because our natural tendency is to extrapolate events of the recent past into the future. So when the markets are up, we tend to be optimistic and think they will always go up, and when they’re down, we tend to think they will never recover.

The secret is to try to maintain an even investing keel — to not get overly optimistic or pessimistic regardless of what happens to the markets in the short term. One way to do this is to commit to a regular automatic investing program in which you invest a certain amount of money on a consistent basis regardless of what the markets are doing.

Sometimes referred to as dollar-cost averaging, investing this way is easy: You simply arrange for a specific amount of money to be automatically transferred from your checking or savings account directly into the investment (such as a mutual fund) at regular, periodic intervals (such as monthly). This may enable your portfolio to grow over time, creating wealth and a potential future income stream that can help meet your living expenses during retirement.

Ironically, the best time to invest money may be when the markets are falling. In a down market, share prices may be lower than they were when the market was higher, thus enabling you to buy the shares of quality companies at lower prices.

Hit Singles, Not Homers

For investors, patience may be the greatest virtue of all. Successful investing usually isn’t about getting rich quick by hitting the jackpot on a hot IPO. Instead, it’s typically about taking a slow and steady approach, with a long-term investing perspective and horizon.

Instead of swinging for the fences — and perhaps striking out — aim for hitting a steady stream of consistent investment “singles.” While they may not be as exciting as home runs, they often produce the same or better results, with a lot less risk.