For Every Amazon There are Hundreds of Vonages

If someone had invested $100.00 in Amazon’s IPO (initial public offering) in 1997, it would have grown to over $100,000 today which can make us wonder if diversification is the smartest approach to retirement income investing. Why not just invest in the next Amazon IPO? Then we are reminded that for every Amazon, there are hundreds of Vonage’s.

As a refresher, an IPO is when a company goes public and offers its shares to all investors. Jay Ritter from the University of Florida recently conducted extensive studies on IPOs (Google: Jay Ritter + IPO for more). The research revealed that – on average – the first-day return of an IPO has been around 18%! But 3 years after the IPO takes place the security has underperformed the total market by around 18%.

If an investor can buy IPOs and sell them the next day, perhaps it makes sense, but these issues are not always available and if they are, the investor is strongly discouraged from selling for at least 6 months. And in the long run, they rarely turn out like Amazon.

For example – Vonage – which was supposed to be the next big thing in VOIP, listed as an IPO in 2006 at $17.00 per share and went on to decline by 90%. It has since recovered somewhat, but 13 years after listing, is nowhere near the initial value. Since there will always be hundreds of other “Vonages” for every Amazon, most investors are better off sticking to a diversified portfolio for retirement income, rather than search for the next Vonage.

Rates Drop Further – Fixed Income Overview

Fed Chair Jerome Powell communicated that the reduction in the fed funds rate was not going to be a series of reductions, but rather a wait and see approach contingent on economic progress over the next few months.

The Fed’s reduction of the fed funds rate was the first since 2008 when the financial crisis had begun. The federal funds rate was essentially zero from the end of 2008 to the beginning of 2016 when the Fed started raising the target rate again.

The 10-year Treasury yield dropped in July to its lowest level since 2016 as markets assessed the Fed Chairman’s comments surrounding any possible rate cuts over the next few months. The fed funds futures market is pricing in a near-certain possibility of another rate reduction in September 2019.

Negative interest rates outside the U.S., combined with expectations of weaker economic growth and minimal inflation, have weighed on long-term Treasury bond yields.

Sources: Federal Reserve, U.S. Treasury