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Success in Personal Finance Usually Comes Down to the Basics and Common Sense

There’s an old Yogi Berra –ism (though correctly attributed to computer scientist Jan van de Snepscheut) about theory and practice: “In theory, there’s no difference between theory and practice. In practice, there is.” While Yogi may have attributed the concept to baseball and Van de Snepscheut to computer algorithms, it also applies to personal finance.Most financial planners will (or should) admit that recommendations they provide to clients are not exactly rocket science and often are rooted in some basic financial common sense, along with a hefty dollop of analysis, tax rules, asset allocation strategies concerning compounding savings and rates of return versus interest amortization, inflation and spending. In short, success in personal finance and planning is often pretty simple to understand to anyone who takes the trouble to carry out the various tasks required to create a workable plan.It is often the execution (or day-day practice) of good financial habits that get people in trouble, (read: being human, with all our collective foibles). We (over)spend when we should save, drive up the credit card balance, forget to pay the life insurance premium, under-insure our car/home, hide our heads in the sand about college costs for our kids, and dismiss the notion of our own eventual demise and fail to get our estate in order. All those things and more.And we forget the lessons of the past. The tech boom and bust of the late 1990’s. The inflation of the 1970’s. How markets recover eventually from a crash. That something for nothing is, and always will be, a fantasy. That companies need sales, revenue and eventual real earnings to survive and support a wildly-high stock valuation. Or how supposedly-secret stock tips or strategies touted by investment newsletters are not really so secret or exclusive (except to you and three million of your closest co-subscribers). And despite common knowledge about Ponzi schemes and ever-vigilant regulators watching out for unethical product-pushing, advisor-charlatans, consumers still get taken to the cleaners at times. PT Barnum is attributed with the snarky comment about a sucker born every minute. When it comes to personal finance, Barnum was a prophet.In our 24 years as a firm, we’ve seen that many clients do, in fact, have a pretty decent handle of what they’re trying to do and why. Circumstances and life-events may have derailed their initial plans or perhaps things didn’t work out the way they hoped. That’s life, of course. In most cases,our work with these folks have been chiefly to crystalize and structure what they innately know about their money – they often just need someone who, with some specialized knowledge and the software programs to demonstrate in charts and graphs, can help them flesh out the numbers and forecasts into something they can grasp and understand. With this direction and a second opinion, people often feel empowered to forge ahead toward their objectives, despite the many obstacles and setbacks that are part of life. For the most part then, people have a good feel for where they are, whether their future looks bright or potentially troublesome.After these many years, we’ve also seen that even those with modest means can build wealth for the long-term. For these people, their advantage is having stout fiscal discipline, adherence to a plan of some sort, a conservative lifestyle and the faith that the sacrifices they’ve made along the way will serve them well in the future. There are many new financial books published each year, but the basics remain the same. The markets, investing trends, financial gurus and politicians, of course, all come and go, but if you save for the future, invest widely and carefully, avoid falling prey to get-rich schemes or ill-conceived financial decisions, most likely you’ll end up with sufficient financial success to fill some, if not all, of your dreams and aspirations for you and your family. It just takes a plan and the willpower to execute it.

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An Estate Plan is for Everyone

Estate planning is an important part of a good overall financial plan. Here is a list of common estate-planning mistakes we see in the office from time to time.A first mistake is thinking that you don’t need an estate plan because you don’t have gobs of money that you’re leaving behind. This unforced error is rooted in the misconception that estate planning is just for the uber-rich who might be subject to inheritance taxes. While the wealthy may indeed have more complex planning, the core reason for estate planning is to develop a plan for the distribution of assets, during severe disability or ultimately death, according to the wishes of the individual, in the most expedient, efficient and least cost possible. As a local attorney once said, “You want to be looking down from heaven and all is transpiring the way you envisioned.” Estate planning involves more than just trusts and a Last Will. Nearly every good estate plan includes documents such as Durable Powers of Attorney, a Living Will and specific provisions for dependents that may be left behind. One of the next biggest mistakes is the failure to title assets properly. You can have an attorney create the most effective, beautiful estate documents in the world, but they might be ultimately useless if the assets involved are not ‘re-titled’ in the name of said trust(s). For example, if the George & Martha Trust is designed to distribute the George and Martha Investment account in a certain way, but the investment account is not retitled in the name of the trust and has an old beneficiary designation that names George’s first child from a prior marriage as the sole primary beneficiary, guess who gets the money?Which segues into the next big mistake; no or old beneficiary designations. Life insurance, IRA accounts and retirement plans are often the largest assets on one’s estate. Life happens and changes occur which often require updating beneficiary designations. These updates are critically important during major life transitions, such as divorce, marriage, new children, changing objectives regarding heirs, or even just creating an estate plan. A large insurance death benefit may be better off within a separate trust than going to the estate and an IRA beneficiary as one’s estate may result in unnecessary taxes paid.Another less common, but important, mistake is naming inappropriate fiduciaries, such as executors, trustees, etc. Naming your eldest sibling to take care of administering your estate is a common default many people use, but is your eldest sibling the right person? He or she may not be all that organized, too busy with their own life or live in another part of the country where taking care of matters after you’re gone would be a huge (and costly) burden for them. For trustees to your trust, some people are just not able to handle the myriad details of trust administration (or may not want to). So when you name executors and trustees, consider these designees carefully and ask them first.These are just a few of the errors that can occur after it’s too late. Have a written plan and exercise great care in the planning.

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Currency is Not Money

If we were to hold up a $100 bill and ask, “What is this?” invariably there would likely be a chorus of voices calling out, “Money”, then mutters of disbelief when our response would be, “No sorry, that’s not correct”.Well if that “Franklin” isn’t money, then what is it? It is ‘currency’, a medium of exchange representing an amount of government-backed value that can be freely exchanged for goods and services in the good old U.S. of A. Well, okay, you say. Then what is money?In the purest sense, the word ‘money’ is actually purchasing power – the ability to take a measure of stored, generally-accepted value, (whether dollars or clam-shell wampum) and exchange it for an equal-valued item or service desired. The reason I call your attention to the difference between currency and money is that this is essential to knowing why we save and invest for the future. It is also critical to understanding why, despite the anxiety that may be part of investing, we shouldn’t just stuff our ‘currency’ in the mattress or all in bank certificates of deposit and believe that our ‘money’ is safe. The currency units (dollars) in the bank may be safe, due to guarantees by the Federal Deposit Insurance Corporation (FDIC), but even then, our currency dollars are leaking purchasing power every day.In the early 1980’s, a depositor might have earned about 15% on his bank CD investment. Sounds wonderful, right? The problem was one of context, because inflation (loss of purchasing power) was just over 10 percent in 1981. So really, the CD-owner’s nominal purchasing power may have only increased by about 5% (pre-tax, of course). Depending upon that particular individual’s tax bracket that 5% increase in purchasing power may have been reduced by another 1.5% due to Federal/State taxes on his interest, bringing his net gain to about 3.5%. Nothing to dismiss, of course, but not quite as juicy as that original 15% either.So when we are making contributions to our IRA’s, our 401(k) accounts and college savings accounts, we are deferring current consumption at today’s purchasing power in order to create greater purchasing power that we want (and need) in the future. And in order to maximize our future purchasing power, we ought to be investing in things that have at least a fighting chance of outpacing the ravages of inflation over time and help our limited savings grow. This is the reason that, (in line with our ability to tolerate the volatility) some portion of our investments ought to be as “owners” (shareholders) of companies, not just as lenders (to companies or banks) through bonds and other forms of “fixed income”.With investing, one size doesn’t fit all, so your neighbor’s tolerance for risk in stocks and stock funds may differ from yours, as does his/her goals and objectives. The point here is to encourage all to understand a core concept of why we invest our money. It’s the added purchasing power we seek to combat the erosion of inflation over time and it’s really not a matter of choice, but of necessity.

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Maintain Some Perspective When Evaluating Historical Investment Returns

In the world of professional investment advisors, the phrase “Past performance is no guarantee of future results” is a staple (or should be) within client conversations, literature and most any other form of communication with the investing public. There’s a good reason the regulators are so adamant in preventing financial advisors from misleading the unwary investing public by touting an investment’s past success – it’s not all that hard at times to cherry-pick data in order to persuade a prospect that their future investment returns could be stellar, based upon what that investment has done in the past.Like everyone else, advisors want to forget the Great Financial Crisis (GFC) of 2008 and the abysmal investment returns that occurred that year. When advisors, fund representatives or even individual investors themselves review historical returns of an investment, what occurred in 2008 usually looms large in several places; in the multi-year period performance figures (usually 3-year, 5-year, 10-year or “since inception” results), in the “Best/Worst” performance results for a 3-month, 6-month or full-year period, or in historical returns “by year”.Often though, performance reports may limit their listing of past performance at 10 years (‘since inception’ is too general and ambiguous to be useful). This is where the passing of 2018 becomes significant. As occurred after 2011 for the 3-year returns and in 2013 for 5-year period returns, after 2018, the 10-year return averages for investments such as mutual funds will see the horridly negative results for 2008 fall out of the equation and may offer a little boost to the 10-year historical results. In addition, investors need to be aware that the general US stock market has been on a bit of winning streak; as measured by the unmanaged S&P 500 index, there have been no down years since 2008. In 2011 the S&P 500 returned 2.11% and in 2015, the return was 1.38% (Source: ycharts.com), but otherwise, in each year from 2008-2017, a potential investment in S&P 500 index delivered double-digit returns (but of course, there’s no guarantee of a repeat!). The point here is that an investor looking at these returns next year might be unaware that they’re seeing results during a historic 10-year bull market and uptrend (assuming we end 2018 on an up-note). The fact that markets do, in fact, go down and sometimes severely may be lost on such individuals unless someone (like an ethical advisor), point this out to them (perhaps using 2008 as an illustrative example). Markets can also be volatile in a year, but end up with mediocre returns at the end (as in 2011 and 2015, but also 2005 and 2007).So when evaluating investment returns as part of your due diligence research, go beyond the published numbers on the “quick fact sheet” and dig a little. Get a little more perspective and be thoughtful about whether the investment is relatively new or whether it (and the portfolio manager behind it) has some “battle scars” to show. This also goes for the relatively new, (but highly touted and popular) Exchange-Traded Funds (ETF’s) which have yet to participate in full blown market decline or bear market.

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Critical Thoughts on Meeting College Costs

In the nearly two decades that we have written about college financial planning and helped client families figure out how to pay/finance college expenses, we’ve come to some sobering conclusions. Since it is September and the college admission and financial aid application season will begin October 1st, we’re hoping these will resonate and help readers make good decisions about college choice and funding.An Internet search will likely show you that total student loan debt is about $1.5 trillion dollars in the US today. That’s 5x the amount of debt in 2005, according to the Federal Reserve. If you were to research “Why all of this debt?”, you’ll get; More students are going to college today, more are taking out loans, college costs have increased faster than inflation, states don’t have the money to subsidize public colleges, etc.But there are little-understood, more subtle reasons for this crisis and it starts with family finances. First, stagnant “wages” for the average family is a huge problem. Most middle and upper income families are finding it difficult to pay their bills and perhaps put a little aside in the 401k for retirement. A chart I keep in my office shows college costs rising at a steady 45 degree angle for the past 20 years, yet average wage growth per capita (adjusted for inflation) is flat. So without savings or extra cash flow, the family has little choice but to borrow (heavily) if they want their student to attend a good college. The next reason is consumer debt and the inability to live within one’s means. An oft-cited statistic reveals that 46% of American households would be unable to pay a $400 extra expense without selling something or going into debt. Add the cost of one or two college degree costs at $25,000/year or so (after financial aid is figured in) and the family budget is at DEFCON 1. Lastly, college students and their parents should copy/paste this next sentence as their smartphone screen wallpaper: Every student borrower must fully understand and calculate their future ability to repay their loans upon graduation, given the career choice and the earning potential of their first job(s) during the repayment process. What does this mean, exactly? It means the student and their parents must research what the student’s earning potential will be after graduation, calculate normal after-tax living expenses, then the “carrying cost” of the aggregate student loan debt in monthly payments, and then determine whether all of that debt is affordable to attend the chosen college. If not, move on to a less expensive school choice. It’s that simple, but that critical. Otherwise, the student is possibly being set up for financial disaster in the future. Current debt counseling at the colleges doesn’t go this far, but students and their families need to. “College financial planning” means exactly that – families need to have a thoughtful, thorough plan to tackle college costs and financing from middle school right through to the last college loan payment. Otherwise they and their student(s) could be flying blind into a financial hailstorm.

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Behaving Yourself in a Dull Market

After many years helping clients, we’ve come to believe that we offer more of financial therapy than anything else. And yet, “behavioral finance” (or how people react to money-related situations) is something that is woefully lacking in the Certified Financial Planner™ curriculum, although this is an area so critical to personal financial success that it ought to be part and parcel of everyone’s understand of money, and especially investing. When the topic of ‘adverse investing behavior’ comes up, you might first think of how people react in a market decline, but unproductive behavior can also arise in tepid market periods as well.Case in point could be the general investor’s viewpoint of portfolio returns so far this year. Lately we’ve been speaking with some clients who have conservatively-invested accounts and are a bit perplexed at the low-no growth of their account values so far this year. For many investors, 2017 was a banner year where both stock funds and bond funds may have exceeded expectations and without the pesky side-effects normally associated with investing, such as volatility. This year, however, is a different story. With steadily-rising interest rates, some bond funds have been experiencing challenges in delivering positive returns so far. Volatility has returned to the stock market as well, with events like rising interest rates, tariffs and trade wars, and the usual corporate news cycle affecting index movements on a weekly or daily basis. As a result, investors who have grown a bit complacent about normal risk and volatility may be getting a little antsy when their monthly or quarterly statements don’t show the same kind of appreciation they remember from last year.So some investors are calling to ask, “Why hasn’t my account gone up yet this year? Shouldn’t we be doing something (different)?” Which is akin to planting seedlings in your garden, throwing down some water and then after a week or so, just staring at the plants and shouting; “Don’t just sit there. Grow!”In these situations, the primitive part of the human brain has taken over. Whether out of fear, greed or another gut reaction, the inclination grows stronger to “take control and do something”. That is when an understanding of investor behavior is useful, but one that even personal financial professionals (and most of Wall Street itself, usually) loses a handle on. Scott Adams, author and creator of the comic strip “Dilbert” once wrote: “If you want success, figure out the price, then pay it.” When not much is happening with your investment account, the price you may have to pay is patience and uncertainty. Many won’t and end up taking a wonderfully-allocated portfolio and “tweaking” it or changing a great long-term strategy that could prove ruinous in the end. Sitting on your hands may be a boring recommendation and goes against that voice emanating from the primitive brain, but could end up being your best personal finance idea this summer.

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Despite Resources, Americans Still Unprepared for Retirement

Last week, a new client came to see us to discuss the possibilities of her cutting back on her professional work schedule and transitioning toward full retirement.Although an analysis may show that her savings and Social Security income are sufficient to achieve her objectives, there would be a few uncomfortable options if there were severe shortfalls, mostly because she is almost at her retirement age.

Earlier this month, Northwestern Mutual published new research and data that indicates most American adults are (rightly) concerned about their prospects for attaining the retirement they would like. In the study, fully ¾ of those surveyed are at least “somewhat concerned” about affording their envisioned lifestyle and two-thirds believe they will likely outlive their retirement savings.

Additionally, the study emphasized several disturbing conclusions, based on the data gathered:

1) 21% of Americans have no retirement savings whatsoever.

2) 33% of those aged 54 – 72 (the Baby Boomers) have less than $25,000 in savings.

3) Half of American adults “have taken no steps to prepare for the likelihood that they could outlive their savings”.

These findings are even more troubling when one considers the following real-time issues that many retirees will face in the future:

1) While small steps are being taken to shore up the Social Security income system, senior healthcare (Medicare) and poverty-based medical assistance (Medicaid) programs are woefully underfunded and the situation is expected to get worse.

2) Most government and municipal pension plans are severely underfunded.Corporate pensions are becoming a benefit of the past and roughly 40% of major corporate pension plans are less than 80% funded (2017).

3) Medical costs and health insurance premiums continue to escalate at a rate higher than aggregate inflation levels, a rate only exceeded by rising college costs.

4) Long-term (custodial) care insurance premiums are almost unaffordable by many households for both senior spouses and the prospects for needed such care in one’s last years are increasing as people continue to live longer.

What this means is that no one should be waiting until their sixties or age 70 to figure out where they stand regarding affording their retirement.Even having a rough idea of how much in savings will be needed alongside Social Security to finance an expected retirement lifestyle is better than no plan at all.Whether or not you retain a professional to guide you through this process or you use the myriad of online retirement tools to create your own plan, now that we’re well into another year, start now to prepare.Don’t be like the 50% that haven’t a clue about their financial future.

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Investing in a Time-Share: Good Idea or No?

Over the years, we’ve periodically fielded questions from clients asking whether purchasing one or more time-share units in vacation destinations is a good idea. The locations range from Florida to Newport to Arizona, various Caribbean Islands and Mexico. (During the Crash of 2008, we also received several panic calls asking how to unload units that had lost over 50% of market value, but I’ll get to that shortly.)

So let’s assume you’re on vacation (say, somewhere sunny, warm, with sand, surf and umbrella-garnished drinks at your elbow) and the thought – or sales pitch – comes along; “Why don’t we invest in a time-share here?” Naturally, this seems like a great idea. You’d have a nice vacation spot to come back to each year without the hassle of finding accommodations, there’s no upkeep to worry about, you can potentially trade locations with other owners, and it’s a nice ego-polish to say at a social event, “Yep, I have a time-share in ‘fill-in-most-impressive-tropical-destination’” to friends, associates and the opposite gender.

Financially though, there’s more to it. First is the up-front price which, depending upon the location, might be anywhere from several thousand dollars to $25,000 or more. Then there are the annual fees. Yes, even if you don’t use your time-share in a particular year and similar to a membership fee. And that’s not including the “special assessments” which are apportioned amongst all unit holders if a major project has to be completed on the building you own a piece of.

Many get sold on the potential ‘profit’ feature of time-share ownership. Sadly, the statistics bear out a different story. Timeshares are often hard to sell, mostly because there may be a massive oversupply in the area. This is what occurred to many owners after the real-estate crash in 2007-2008. We still remember some clients asking whether we could offer any advice on how they could unload their ‘underwater’ vacation condos or time-share units, especially to save them the annual fees they were paying. And to add to their woes, many found out from their tax advisors that the IRS doesn’t allow a capital loss deduction on selling a time share below the purchase price, as with other investments and real estate.

So as an investment, unless you happen upon an unusual situation, (and this would not be those offered by sales companies who offer free stuff to get you to hear the pre-hard-sell presentation), a time-share may not be the best idea. Otherwise, here are few tips:

1) Think of the idea as a lifestyle purchase, not an investment. If you really like the vacation spot and think you’ll be there each year without fail, then buying may not be a bad idea.

2) Don’t buy on impulse. Take some time to percolate on the idea.

3) Look before you buy. And I mean physically-look, not just online, as you would a house.

4) Crunch numbers. Pencil out the costs of purchase and fees over 10, 15 or 20 years against renting. How much are you really saving?

5) Try for a unit that will make you part of an owner’s association. Having an association group banding together for disputes with management can often be helpful.

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Cybersecurity Measures are Vital for your Personal Finances

Cybersecurity is becoming more important in the world of personal finance. In fact, so important that securities regulators have been cracking down on investment companies of all sizes to ensure that client data and private information is secure and protected from hackers. Despite all of this scrutiny, hackers still manage to get through banks and financial institution systems. (Remember the Equifax hack last year?) So it’s vitally important to protect their finances from cyber-attacks. Here are some tips and strategies.

1) Passwords – Obviously an important area. Don’t be lazy with selection of your passwords. Be creative with your passwords. Don’t use your name or family members’ names, and no birthdays. Most cyber-experts recommend using both upper and low case letters, random and multiple numbers, and include symbols, such as ‘&’, ‘@’, ‘$’. Some financial institutions can even provide you with a device that changes the last several numbers of your password each time you access your account. (Our client account access passwords are over 15 characters long!). Change your passwords every 6-8 months for all your accounts.

2) Consider implementing a “two-step” verification for your bank and investment accounts. This strategy often requires a first-step user name and password, then a code sent by the institution to your mobile phone or other device to enter for the second step of access.

3) Don’t store your passwords on your browser.

4) Try to not let your credit cards get out of sight when you use them, even in restaurants. This can help prevent dishonest workers from copying the information on your credit cards to use later. Also, set up a notification process with card issuers to notify you by email or text when they detect unusual activity.

5) Store and carry your credit cards in a metal casing to prevent sophisticated data thieves from copying your card info using scanning devices.

6) Avoid checking your bank, credit, investment and other accounts via public Wifi, such as in café’s, restaurants or other public places. Data thieves can often copy your access info while on the same Wifi system.

7) Update your computer with anti-virus software regularly and always install updates when notified. Be sure to back up your data onto a secure storage system. Consider installing a firewall on your home WiF to prevent hacking of your home computer. Scan your computers for viruses regularly.

8) Be sure to use personal passwords to lock your smartphone and other devices. If these are lost or stolen, your info won’t be as easy to access.9) Finally, lock your credit reports with the three major credit agencies; Equifax, Experian and TransUnion. Doing so may not prevent hacks of your current accounts, but it could prevent a thief from opening a new credit account in your name without your knowledge and ruining your credit status.

The extra measures we all should take to protect our finances are unfortunate, but critical in this new reality of cyber-data and electronic information storage. It may be a hassle to continually have to update and monitor your cybersecurity measures, but speak with someone whose information has been hacked – it’s worth it.

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More Than a Bit of Risk in Bitcoin

Up to now, we’ve been reluctant to comment publically about so-called crypto-currencies, however, there has been so much media coverage on the exponentially-rising prices of these over the past few weeks that the need to weigh in is now acute. We’ve also witnessed a flurry of cryptocurrency-related events over the past weeks, including; 1) many questions on this topic posed by the advisor-audience recently at an investment conference we attended, 2) online advertisements for Bitcoin investing courses, Bitcoin IRA’s and even former pole-dancers now promoting themselves as “Bitcoin experts”, (we’re not kidding!), 3) inquiries from people who had little idea of how cryptocurrencies work, 4) “Bitcoin futures” began trading on the Chicago Board of Exchange this past Monday, and finally, 5) recent Securities and Exchange Commission (SEC) warnings on the extreme risks in crypto-currencies. So we’d like to make some observations, even if this article prevents just one reader from making a huge financial mistake.The concepts of digital currencies, block-chain databases, & protocol development are extremely complex and for those who aren’t computer professionals, the explanations can be head-spinning. The most simplistic example of how Bitcoin may work in cyberspace is that of a county fair, where an attendee exchanges fiat currency (dollars) for tokens (Bitcoin) that can be used to purchase goods and services with the financial ecosystem of the fair (the cyberspace of protocols and “smart-contract” platforms). The tokens are not (generally) useable or exchangeable outside this specific environment, but only within this cyber-system are they deemed useful and a unit of value.

For most now, the appeal of Bitcoin does not seem to be its utility as a general currency (which, by its current volatility, lack of regulation and lack of economic sponsorship, makes it impractical), but by its ‘trade-ability’ as some type of asset-class. Apart from a relatively few entities that accept Bitcoin as a unit of value in the fiat world, its chief appeal is, for now, something that can be bought using fiat currency and sold at a future date for a (hopefully) higher price back into real-world currency, which can be then spent normally. (After taxes are paid on any gains, of course).

As fervent proponents exclaim, Bitcoin may have the potential one day to become more than just a tradeable item. For now, we can’t help thinking about similar investment reasoning made by the dot.com enthusiasts and day-traders of the late 1990’s or the real estate flippers of the mid 2000’s. Today’s justification sounds all-too similar to the past kind of mania that ensnared the unknowing and unwary, most who were looking for supposed quick and easy profits. The technology may indeed one day be practical, useful and a part of our society, just as the Internet and smartphones have become over time. For now, however, I caution against getting swept up in the fervor. Just like early dot.com companies such as AOL, Yahoo and others in the 1990’s, this sector of technology is still quite young and developing. You’d be wise to hold onto your cash until the eventual maturation and shake-out occurs. Would-be buyers beware.