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Rueters/Mike Blake
Don’t buy the hype

Why you should sit out the IPO investing stampede

Member exclusive by Allison Schrager for The tech IPO boom

Big initial public offerings aren’t as common as they once were. Firms stay private longer, which makes the recently announced IPOs of Lyft, Pinterest, and Uber all the more exciting. These are companies that have become integral to many peoples lives and for many, it may seem like a great idea to buy a piece of them now that you can. Just think if you bought shares of Amazon, Apple, or even GE when they first went public.

But don’t fall for the hype. IPOs are risky. If you compare their performance to more established stocks, it just isn’t worth it. The basic rule of finance is if one portfolio is riskier than another, yet both offer a similar expected return, avoid the excessively risky one. While IPOs do offer more potential reward, its not enough to justify the chance they’ll drag your portfolio down. If you want to own a piece of Uber, it may be better to wait a year.

Efficient markets and IPOs

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