Three Reasons to Not Buy a Company’s Stock During an Initial Public Offering (IPO)

Every now and then, a company’s Initial Public Offering, or “IPO”, will cause mass hysteria amongst many investors. Oftentimes, it is an IPO of a company with a popular product that caters to the masses.

Unfortunately, investing in IPOs with the assumption that one will make a quick profit is misguided. While investing in a company that’s recently gone public can of course be warranted, rational thought and ample research should be exercised prior to making any investment.

With that in mind, here are three reasons to not buy shares during an IPO.

 

#1. “If I’m buying shares during an IPO, I’m an “early investor.” Surely I’ll be profitable when everyone else wants to buy later.”

               While you may be considered an early investor for purchasing shares on a public exchange, you are certainly not an “early investor.” Generally, a private company that is in growth mode will likely have had multiple rounds of private equity cycles, where investment firms and private investors will buy ownership of companies to provide capital to the growing company. These are the parties who “got in early,” so to speak.

#2. “Everyone is talking about this IPO – demand will be so high and stay that way.”

It’s true that demand for most IPOs is higher than the supply of shares, which generally leads to higher prices when the stock hits the exchange. Usually, however, the demand for shares can fizzle as the IPO hysteria fades, and the supply will likely increase along with it. With IPOs, owners and employees are required to hold their shares for a period after the IPO – generally around six months to a year. This is known as a “lock up period” – a requirement that allows the stock price to stabilize during the initial phases of the publicly traded stock.

The conclusion of a lock-up period can often bring a glut of share supply. Owners and employees who wish to sell the shares at the inflated prices driven up by initial public demand can suddenly turn a seemingly hot stock into one that has a lot of downward pressure on its share price.

#3. “If a company is going public, it must mean that it is in great shape financially.”

There are a few problems with this rationale. For one, it’s unlikely that there is ample information on a private company’s fundamentals, especially compared to an established publicly traded company. In addition, a company’s immediate run up in price after its IPO can lead to lofty valuations. When investing in an IPO, never assume a company has a healthy balance sheet, is growing exponentially, or is even profitable – because oftentimes they are not.

 

Investing in IPOs can be a wise investment decision. However, like all other investment decisions, it’s vital to perform research and due diligence before investing. Be sure to avoid the temptation of emotional investing; getting caught up in the media hype of a highly-anticipated IPO can lead to baseless investment purchases that can wreak havoc on your portfolio.

 

*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

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Avoiding Higher Tax Brackets in Retirement with Partial Roth Conversions

As a retiree, it’s important to know and understand the basics when it comes to withdrawal order of your nest egg. Generally, conventional wisdom states that its best to spend down your cash and after-tax funds, while allowing your tax-advantaged investments to grow. But is this always the case, or can there be a such thing as “too much” tax deferral?

When accounting for all factors – including taxes, RMDs, and sources of retirement income – the answer often becomes more complicated.

Consider this example:

Mr. and Mrs. Smith, both aged 62, are recent retirees. Their combined income after deductions is $55,000, putting them squarely in the 15% tax bracket. They can live off this income, despite it being substantially lower than their working years, by tapping into their savings of $200k when needed. They are each eligible for social security income of $2,500 a month at full retirement age, and have managed to save $1.25M in their IRAs. Mrs. Smith will also begin receiving a private pension of $15,000 annually beginning at age 65.

In the case of Mr. and Mrs. Smith, continuing the tax deferral of their tax-advantaged accounts is likely not the best solution, and the couple should take advantage of their tax situation in their early 60’s. To do this without withdrawing the tax-advantaged funds, they can utilize a Partial Roth Conversion. In doing so, Mr. and Mrs. Smith can “fill up” the lower tax brackets by paying taxes on the IRA funds they convert to a Roth IRA. Mr. and Mrs. Smith will have access to tax free withdrawals in their later years, and will reduce their RMDs in the process.

Source: IRS.GOV

*If your nest egg is primarily tax-deferred investments, do your best to “fill up” the tax brackets in green in your early years of retirement

Reducing their RMDs, as well as having access to a stream of tax free funds in their later years, will be vital when their other sources of income kick in. Given that Mrs. Smith’s pension and 85% of the couple’s social security will be subject to tax, the Smith’s marginal tax rate will very easily jump to the higher, undesirable tax brackets. This will be doubly worse if the Smiths are forced to take RMDs that they don’t necessarily need to support their yearly expenses.

This example is a very common situation for recent retirees today, given that the primary source of retirement savings is through tax-deferred, employee sponsored 401k plans. Sometimes it’s important to challenge conventional wisdom when planning for retirement, and to recognize that seemingly crazy ideas, like paying tax now instead of later, may be something you should consider.

 

*This information is not intended as authoritative guidance or tax advice. You should consult with your tax advisor for guidance on your specific situation.

DOW 20K – An Amazing Run, But Who Benefited?

“The Dow hit 20,000. The Queen of England turned 90 last year. Both are round numbers. Neither carry any real significance.” – Greg McBride, chief financial analyst at Bankrate

 In January, one of the world’s most renowned stock indexes, the “Dow Jones Industrial Average,” hit the much anticipated 20,000 mark. While this is a tremendous run since the low of 6,507.04 in March of 2009, most Americans weren’t willing to participate in the market over the past eight years. Per the Gallup chart below, the ownership of stocks by U.S. adults steadily declined for much of the bull market in U.S. Equities.

In fact, this trend only began to reverse after 2013, which happened to be the best year for the Dow since 1995!

Unfortunately, this is an all too common occurrence in the world of investing. When a bear market rears its ugly head, there is almost always a resultant lingering effect of risk avoidance from common investors. Conversely, when the market is rolling, or when psychological milestones are reached, market sentiment is sky high.

It’s important to remain level headed throughout entire market cycles. In our view, letting emotion drive investment decisions will certainly lead to inferior performance over the long run. Above all, maintaining a diversified portfolio that matches your personal level of risk is the one proven method of ensuring financial stability.

So, let’s celebrate Dow 20k for what it is – a cool round number. But let’s also use this moment as a reminder to stay the course when times get rough.

 

*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Our Top Three Financial Resolutions for Pre-Retirees

The year 2017 is upon us, and like all other New Year’s, many of us take this time to improve ourselves through New Year Resolutions. Sadly, per a recent Fidelity study, only 36% of us are determined to improve our financial situations through this declaration of self-improvement. With this in mind, here are our top three New Year Financial Resolutions for pre-retirees this year.

1. Give your 401k a boost
A general rule of thumb is that you should contribute enough to earn the maximum match from your employer – at the very least. Those who can manage to defer more of their salary to their plan should not allow complacency to prevent this from happening. Utilize components of the plan that will help you save more, such as electing the automatic contribution increase option. For high earning pre-retirees that got a late start at building up retirement assets, consider deferring the maximum amount allowed by the IRS ($24,000 at age 50 and above).

2. Review previous employment accounts
If you nearing the end of your career, chances are you have been employed at multiple companies with varying benefits. A growing number of 401ks, pensions, and other perks throughout your career can make it difficult to keep track of your situation as you near retirement. Leaving behind old retirement benefits can result in unwanted market risk being taken, as your investments at old employers are likely more aggressive than your current 401k allocation. In some cases, old retirement benefits can even be forgotten, leaving a plan provider with limited ability to make you aware of your benefits if you’ve moved or changed names.
Consolidating old 401k accounts to your current employer or to a financial professional is an easy way to ensure that all your accounts are accounted for and are being managed properly.

3. Trim down concentrated holdings
As you approach retirement, one of the largest risks that can derail a retirement plan is unnecessary business risk. Ownership in employee stock and single stock holdings that have appreciated for years can mean that the performance of your retirement savings can be far too reliant on a single company. Diversifying is always important, but it is especially important as you approach retirement. So even if the stock has done you well over the years, it may be worth selling to eliminate such risk.

*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.