Have you ever thought with so many IPOs happening each week…how could you possibly make sure
you don't miss out investing in the big one...or maybe better yet limit taking a position in
the wrong ones? Well if you're into investing in IPOs or newly available companies in general,
you probably are a little bit of a gambler at heart. Today I'll share my thoughts on
what I think of some of the options out there, which might be more or less riskier to invest
in, and also give you a couple of options if you want to take a more diversified approach.
And then I’ll wrap up sharing my own personal investment strategy in general and how IPOs
fit into it.
Welcome back to Healthy, Wealthy, and Wise, the channel that's been talking a lot about
IPOs. Earlier this week, we had our IPO This Week show where we saw it was a lighter week
for new companies coming out… so as I was sitting on my deck today enjoying the nice
weather thinking about what to talk about next, I thought let's do something different
today and maybe talk a little bit more about IPOs as part of an investment approach and
then I could also share with you how IPOs fit into my own personal strategy. As most
of you know, IPOs in general can be pretty risky to invest in... BUT with greater risk
comes potentially greater rewards, right?!? So I was thinking that I can talk with you
today about what I consider the different types of options for passive investing in
a new company...with passive meaning not getting directly involved in a startup--who wants
to do all that work?! So how I look at it is there are 3 main options
or tiers, with each tier having a different level of risk. But before I get into it, I
just want to make sure you all remember that I'm not a financial advisor and I'm not providing
any financial advice for you to act on you, I'm just sharing my personal thoughts and
opinions. Got it? Got it. So starting off, I would say that investing in a SPAC or special
purpose acquisition company is probably the most risky to me. With a SPAC, you're basically
putting your money towards the founder of the SPAC to make a decision on a company to
acquire, and you don't know what that company is. Typically you know the sector or industry
that is being targeted, but that's about it. And that's why they're commonly known as blank
check companies... You're basically giving your money to who you believe is an expert
and trust that they will make the most out of it for you, which some could argue is less
risky because an expert probably knows more than most of us do, which would be a fair
argument...but not knowing where my money is going into seems risky to me… or maybe
I just have control issues, I don't know. To me this is the option that is the closest
to true gambling because the only decision you’re making is whether or not to hand
over your money to someone and hope that someone knows what to do with it. Now because of that,
one of the positive things is it doesn’t take much of an investment of your time. Myself,
I've never invested in a SPAC, and I’m not hating on it, but I just like the ability
to analyze a company that I’m gonna be investing in for myself versus putting all of my faith
in the person who founded the SPAC, that's just me...having said that, I know this year
they’ve become much more popular and I've debated with myself if I should cover those
on this channel, mostly because I don’t know if there would be much information I
could give you other than to say it's out there and what it's targeting. So maybe you
guys can help me decide by writing in the comments simply either yes, if you want information
on new SPACs, or no, if you don't really care to hear about SPACs...I’m always wanting
to hear what you think. For instance, shout out to Steve in the community whose feedback
supported my own thoughts on potentially covering all the IPOs coming out...which, of course
is what we’re doing now with our IPO This Week feature…his input definitely helped
confirm an idea I was considering. Alright... getting back on track, the next
tier is the individual IPO, which I would say is less risky than a SPAC because at least
you know the company you're investing in.... With this option you get a chance to learn
more about the company by researching its history and its IPO registration statement
or filing. Obviously there is a range of risk within the individual IPO tier, from the more
volatile and risky startups and early-stage biotechs versus the more established companies
that have been out there for awhile, such as Quicken Loans and Albertsons Companies
that went public earlier this summer. Investing in individual IPOs at least gives you the
option to learn more about the company by looking at its history and what the IPO is
trying to do: whether trying to obtain cash for growing the company or just reimbursing
its private equity investors. Plus you can consider its product or service and compare
it to what’s out on the market. Obviously this is the tier we’ve been covering a lot
here on the channel and that's because, while I'm not an advisor or predictor of how a stock
will do, I love the research part of it which is a lot of my background and I think if you
find the right information, you can make a pretty good decision most of the time. Now
the downside with this tier is that it definitely requires the most time of the 3 tiers because,
not only are you investing your money, you’re also investing your own time into learning
more about if the company is a good bet for you...well, at least hopefully you’re doing
that! And taking time to watch our videos shows you are putting some of that time ib.
Personally in this tier, I look for companies that either have a market edge with an innovative
product, a history of growth, and a purpose for the IPO that makes sense to me, which
usually means they're investing into growing the company more, not just paying off the
insiders. That takes us to what I consider the last
tier of risk for investing in new companies or IPOs and that is through an exchange traded
fund of IPOs. So the idea of exchange traded funds or ETFs in general is really an evolution
from mutual funds which allows you to diversify your investment by putting your money in a
fund that holds many companies. Mutual funds or ETFs typically have indexes they track
such as the s&p 500 or the Russell 2000, but they also can track specific sectors like
healthcare or tech.. So using an s&p 500 ETF as an example, the fund invests in companies
in the index and looks to mirror the performance that you would get if you invested in every
company in the index, which you typically wouldn't do because there would be 500 companies
that you’d have to put your money into separately and then allocate that based on the market
caps….again, too much work! The big benefit of an ETF is obviously diversification...
So that even if a few companies do poorly in the index, the rest of the companies can
pull up the overall return, which makes this potentially less risky than SPACs or individual
IPOs. Now that's not to say that an individual stock in the index won’t way outperform
the rest of the index, but that's what you get with diversification, less volatility
and a steadier performance over time. If you like that approach, you might also like investing
in IPOs that way as well, as there are some IPO ETFs that you can consider…and as a
heads up, I’m not recommending these ETFs, just wanted to let you know there out there
if you want to look more into IF the ETF approach is something that fits better with your investment
style and risk tolerance. One of the biggest out there in assets managed is the First Trust
U.S. Equity Opportunities ETF, ticker FPX. This ETF has been around since 2006 and tracks
a cap weighted index of the 100 largest IPOs over the first 1,000 trading days of each
stock, which means it gets sold on that 1,000th day. Year to date, the fund has a return of
4.72%...so hardly explosive, but still higher than the broader S&P 500 market. Another option
might be the Renaissance IPO ETF, ticker IPO….now that’s an easy one to remember. This ETF
has been around since 2013 and its approach to holding IPOs is different than FPX in that
the fund adds sizeable new companies quickly, but can add others up to 90 days later. Once
they have a company that has been public for 2 years, they are removed at the next quarterly
review. The fund also manages fewer assets than FPX, and with its different approach,
it’s current Year to Date return is significantly higher at 30.17%...the reason I picked these
two were to show you that, just because they’re both IPO ETFs, they are different, and you
should look deeper into the approach that each fund takes. There are more than just
these 2 options, but these are 2 of the more well known ones; you also can find IPO ETFs
that focus on international companies instead of American ones if that's something you're
interested in. So in general, with IPO ETFs you get diversification where you are more
likely not to miss out on the big IPO because you’re exposed to more companies which leads
to less volatility and risk. Plus another benefit is that it takes much less time than
researching into individual companies that are going public, although you still need
to look at the fund’s approach and history of performance, which as we just talked about
with these two examples, can differ significantly. Anyways so that’s a quick look at what I
consider to be a risk-tiered approach into investing in newly public companies. As I’ve
said, I haven’t invested in the riskier SPACs, but I also haven’t invested in the
potentially less volatile IPO ETFs...that’s not saying they’re not right for you, but
that’s just not my approach. My approach is more probably conservative than a lot of
you in the community...I’m more old school, maybe because I started investing right before
the dot com collapse and I know that when everything seems good and easy, it’s not.
Anyways, about 90% of my investments are in mutual funds and ETFs, with most tracking
large cap US companies with more exposure on the growth side. I do have an international
growth fund as well just for a little more diversification. The other 10% or so of my
investments are in individual stocks because, although I feel like most of money is protected
by the other 90% from me making bad decisions, I do like to have a little more input into
what I think can get a better return--so yeah, maybe I have a little gambling nature in my
blood as well. And I’ll invest in IPOs within that 10%, give or take. I do like the idea
of the IPO ETF because I like ETFs in general, I just think IPOs are more risk and reward
so I’d rather stick with the traditional index funds for the majority of my money and
then try to pick and choose in individual companies as more of a challenge which is
something I enjoy. So I’m probably not that gambler some of you might be on here, and
yet some of you might be more conservative in investing than me. But that’s okay, because
this channel isn’t about me predicting the next huge stock or being a fanboy to a specific
company, which probably frustrates a few of you out there, but the channel is really about
me using my 20 plus years of experiences in investing as well as in researching something
and then sharing the most pertinent details in a quick and easy to understand approach,
with a little analytical reasoning sprinkled in. At least that’s what I’m trying to
do and I hope you are all finding value in it. And with that, please like the video if
you enjoyed it and remember to type a yes or a no in the comments if you would like
me to cover SPACs in the future. And if you’re new to the channel, we’d love to have you
join the community, just gotta press that red subscribe button. And with that, I will
wish you a good rest of your week….thank you for watching and, until next time, have
a great day!