Debt Ceiling

What to do

Don't do anything.  Many of you have probably seen your portfolio values drop drastically over the last month and are wondering whether or not you should make changes.  Many investors are putting their money in cash or shifting their assets into more stable market sectors.  While this strategy of moving your money into less volatile places may make you sleep better at night, it is not the best way to manage your portfolio.  Of course the advice above only applies to long term investors who do not need their money anytime soon.  If you are a short term investor trying to make a quick buck, you've probably learned that investing in stocks is like swimming in the middle of the ocean, you're helpless to the forces of the market.

Is the United States going to collapse on August 2nd?

No.  Although CNN, CNBC, and Fox News make it seem like August 2nd is Judgement Day, its not.  Sure, the market might drop a little bit, but in the long run the United States is going to be fine.  A more important point is to not think with such a macro lens and to think with more of a micro lens.  I commonly see people pull their money out of the markets if poor housing data or job data is released, but does this even make sense?  You have to ask yourself how all the economic data actually tangibly affects the individual stocks in your portfolio.  For example, if the United States doesn't get the debt ceiling raised by August 2nd, how much is that really going to affect the amount of coffee Green Mountain Coffee Roasters sells over the next 5-10 years?  How much is it going to affect how many surgical machines are purchased from MAKO Surgical?  Not very much at all.

Investor Psychology

When the news stations are claiming that the world is going to end and your portfolio value is dropping, your natural inclination is to act; well, your natural inclination is wrong.  This is the very reason why the average investor has an average annual return of less than 2% compared to the S&P 500's 10%.  Don't sell if you're in it for the long run.  Believe in the stocks in your portfolio.  

More Stock Picks

I believe that the recent market downturn has created some pretty attractive investment opportunities.  Stay tuned as a couple stock picks will be coming soon.

LinkedIn (LNKD) Update

Original Recommendation


On Wednesday, May 25th I recommended to invest in LNKD using a dollar cost average plan.  You can click this link for the original write-up.  The excerpt below is a specific reference to the dollar cost average plan:


"LinkedIn will no doubt be a volatile investment.  Some days it will decrease in value a lot, and some days it will increase in value a lot.  Because of this, I recommend dollar cost averaging.  This is when you stagger your investments.  For example, if you plan to invest 1,000 dollars in LinkedIn, stagger your investments over a three month period.  Invest 333 dollars now, 333 dollars a month from now, and 333 dollars two months from now.  This will help you account for crazy price swings by averaging out your purchase price."


As it turns out, the price of LNKD has indeed been very volatile.  Check out the 2-month graph below.  Over a two month period, the share price decreased from $93 to $63 (32% drop), and then increased from $63 to over $100 (59% jump).

If you followed the dollar cost average plan that was suggested, you would have invested a third of your money on Wednesday, May 25th at a share price of $94.33 and another third on June 25th at a share price of $69.94.  Let's see the difference that this makes below:


Did not use dollar cost average method:  Your investment would have increased 8.5%.


Used the dollar cost average method:  You would be up 8.5% on your first 1/3rd investment, and up 46% on your second 1/3rd investment.  So, when taking into consideration that you would have only invested 2/3rds of your money, you would be up 18.16%.  And you would still have another third of your money to invest on July 25th!  The math is below:

8.5% return X 33% of the intended investment = 2.83%

+

46% return X 33% of intended investment = 15.33%

=

18.16%

In summary, despite only investing 2/3rds of your intended investment, the dollar cost average method yielded a return on investment of over twice that of not using the dollar cost average method.

LNKD Going Forward

I still believe LNKD is a good long term investment, and thus would recommend finishing out my original dollar cost average plan.  LNKD has been growing at a very rapid pace and is now the #2 social networking website in the world ahead of both MySpace and Twitter, but behind Facebook.  For more details read this article.