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Investing Basics

Markowitz Weighs in on the Facebook IPO With Some Investing Advice

No doubt there’s been a wave of opinions crashing through the web on Facebook’s IPO – “is it overvalued? Will the employees sell out? Is…

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: May 23, 2012

No doubt there’s been a wave of opinions crashing through the web on Facebook’s IPO – “is it overvalued? Will the employees sell out? Is it the best buy out there? And did Zuck really think we wouldn’t notice his attempt at a covert wedding?”

(Respect to Zuck and Chan for choosing a low-key wedding over what could have been a ridiculously lavish affair by the way…)

We’re probably ready to move on from the Facebook frenzy (those of us with a diversified portfolio *ahem*), but a New York Times article caught my eye over the weekend: “Before Leaping, Listen To a Giant”. It was an interview with Harry Markowitz, the founding father of Modern Portfolio Theory and the person “who may have had a greater influence on current theories of finance and investing than any other living person” according to the article.

Betterment is based on Markowitz’s theory of portfolio selection blended with (another theory) behavioral economics. Put simply: the best way to invest combined with the way we intuitively deal with money (and buffering against those instincts that don’t serve us well – like panic, fear, and overconfidence).

Anyhoo. I was curious to see what Markowitz thought about the IPO to-do…

Here’s a snapshot:

– “Forget about individual stocks like Facebook and buy broad low-cost stock and bond index funds instead”. Tick.

– “Allocate them in a proportion that gives you a level of volatility with which you are comfortable.” Tick.

– “Understand that with more bonds and, presumably, less risk, you may end up with a lower long-term return.” Noted — We’re not trying to beat the market, just gain the returns of the market.

– “Rebalance periodically, and change the allocation if your needs or beliefs change.” Tick. Rebalancing taken care of. Only change if my goals change.

– “Then, unless investing is your hobby or profession, move on… Enjoy yourself. Do things that are personally more rewarding.”

Tick, tick, and tick. Isn’t that a refreshing perspective?!

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