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Recovering From the Bursting of the Dot-Com Bubble


Recovering From the Bursting of the Dot-Com Bubble

Brandon Miller is a Financial Advisor with American Express Financial Advisors based in San Francisco, California and can be reached at brandon.j.miller@aexp.com    One of his specialties is comprehensive financial planning for gay and lesbian individuals and couples.

Brandon Miller has a website that can be found at http://gayfinancialadvisors.com/California.htm

If you look at the historical bursting of past “bubbles,” you’ll find that economic growth after the bursts was slow for many years to come. The bubble of 1929 was similar to what we recently experienced because it was based on a technology revolution and the expansion of global communications. After that bubble burst, the decade of the Great Depression followed.

However, only four years after the burst of the dot-com bubble, optimism in the stock market is growing quickly again.  This leaves us wondering if we have not only forgotten the lessons we have learned throughout history but perhaps also overlooked those learned more recently. We may be failing to recognize important warning signs even if they were fresh in our minds just four years ago.

That Was Then, This Is Now

First of all, let’s compare where we were in early 2000 with where we are today.  First, we can look at what is not the same:  In 2000, the NASDAQ was at 5,000.  In 2004, it’s around 2,100.  In March 2000, the Fed Funds rate was at 6%.  In February 2004, the rate is much lower, hovering at 1%. The impact of this rate being historically low is reflected in the Bank Prime Rate which was at 4% in 4th quarter 2003 compared to 9% in March 2000.  The annual average unemployment rate for 2000 was 4% while the rate for 2003 was a much higher 6%.

But you should also look at the similarities between today’s economy and the landscape immediately preceding the 2000 dot-com bubble burst. The gross domestic product (GDP) is growing rapidly, just as it was at the end of 1999.  New home sales are expected to set a record in 2003, just as they did in 1999. People are trading online again, just as they were in 2000.  Dot-companies are advertising again and foregoing profits for revenue.  Analysts are even beginning to value stocks based on 2005 projections, although this is more routine since the market is normally forward-looking. 

The Risk Factor

Perhaps the most important similarity between 2000 and 2004 is the mindset of taking risks.  Thanks to the $125 billion that flowed into the market in 2003, optimism is growing.  While the circumstances may have changed, the current market environment has at least one factor in common with that of the late ‘90s: high stock valuations.

So what can you do differently this time around?  Your best bet is to limit your current and future risk by following some fundamental financial planning strategies, such as:

v      Know your risk tolerance.  Factors such as your goals, your attitude toward investing and you’re time horizon are important to consider when evaluating your level of risk.

v      Consider your timeframe.  Keep your investment strategies consistent with your investment timeframe.  Long-term and short-term goals require different approaches and investment options.

v      Dollar-cost average.  For a long-term focus, use dollar-cost averaging to take advantage of market fluctuation.   Dollar-cost averaging requires a set financial commitment over time.

v      Short term means low risk.  For short-term goals, take low risks with certificates and other investments that have shorter time horizons.

v      Diversify for type, tax and time.  Diversify across several different types of investments.  Also consider diversification in regard to taxes and time horizons.

v      Establish reasonable expectations.  If you’re prepared to deal with market volatility and don’t expect immediate double-digit returns, you can meet the uncertainties of the future with greater confidence.

v      Get help.  A professional financial advisor can help you limit your risk during these uncertain times.  He or she will work with you to develop a comprehensive plan to meet your specific long-and short-term financial goals.

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      This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation.

 

American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer.

Brandon Miller has a website that can be found at http://gayfinancialadvisors.com/California.htm