Financial Adviser: Stay Away From IPOs, Focus on Index Funds

Photo Credit: Richard Drew/AP/Shutterstock
May 15, 2019

By Carlo Versano

Private companies seeking to go public who got spooked by the IPO debuts of Uber and Lyft should remember that the public market has a very different rubric for how it grades companies than private investors.

Chris Hutchins, CEO of the financial planning and advice platform Grove, told Cheddar that while private companies can skate by without turning a profit for years ー"that's the history of growth companies and technologies companies" ー public markets are much more skeptical and demand a roadmap to profitability. When those maps seem only half drawn or too far in the future, as appears to be the case with both Uber and Lyft, the stocks take a hit.

"It certainly affects the way the public perceives things," he said.

Hutchins said Grove recommends to its clientele of millennials just starting out building their portfolios that they stay away from individual equities anyway, and instead focus on a broad basket of ETFs for investing. If you're hot on a particular stock or two, keep that investment under 5 percent of your holdings, he said.

Grove also advocates for only using money that you don't need for the next five years, as market gyrations can prove to be too volatile even for index funds in the short term. "We're OK with market volatility in the long run," Hutchins said. "But not OK with it if you need to make a down payment next year."

While Uber ($UBER) and Lyft ($LYFT) are proving to be cautionary tales in terms of IPO pricing, other debuts like Zoom ($ZM) and Beyond Meat ($BYND) have gone more swimmingly. And the trend of direct listings ー Spotify ($SPOT) went that route, and Slack is planning a similar offering ー shows that even the Street's most experienced market-makers have trouble shepherding this new batch of tech unicorns, Hutchins said, which is why some are just putting the shares out there to let the market dictate the price.

"No one seems to know exactly how to price their company in the market," he said.

For young, individual investors playing with their money for the first time ー it may be safer to just stick with the index funds.

For full interview click here.