With IPOs, the Cheap Shares are Not for Us

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Alibaba (BABA) goes public Friday in what will likely be the largest U.S.-listed IPO ever. The media hype is undeniable. Should you give in?

We looked at a few of the most hyped-up IPOs of the past four years and found that investors buying on the first day of trading pay, on average, more than the IPO’s offering price at market open. And that “premium” eats into potential gains.

Since its 2011 IPO, for example, LinkedIn (LNKD) shares are up more than 360% (as of September 16, 2014) — yet IPO investors who track their accounts with SigFig have an average 67% unrealized gains.

Here’s what investors should know about IPOs before they jump on the next big one:

The first-day premium

The average first-day pop – or price spike – for an IPO this year is 14%. Last year it was 17%. Historically, it has been 10%.

These one-day returns sound amazing. But as our data shows, everyday investors typically don’t enjoy them. Why? Institutional traders get in earlier, at preferred pricing. IPO shares get pre-allocated to institutions. Everyday investors have to wait till the opening bell. When the shares are available to the public, the price reflects the actions of the institutional investors.

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On the first day of the stock’s trading, retail investors paid an average premium of 26% to get into GoPro (GPRO) on the first day of trading, 71% to buy Twitter (TWTR), and 115% to own LinkedIn.

There are, of course, exceptions. Facebook (FB) investors only paid a 5% premium to purchase price as the underwriters boosted the initial share price three days before the IPO and Facebook released 25% more shares to meet the huge demand. A premium was baked into the price before the opening bell. The market was flooded with overvalued shares. When the stock didn’t get a pop and some negative reports on FB came out, the stock took a long slide. Of course, if you stuck it out you’d be pretty glad now.

And there are the outright flops. Zynga (ZNGA) investors paid an average $10.06 to go in on the company’s December 16, 2011 IPO, barely above the initial offering price of $10. Today, the stock trades right around $3.

A turbulent ride

The months following IPOs are notoriously shaky as big institutional investors flip shares, and employees and early investors sell out after the end of the customary six-month “lock-up” period.

Last May, as Twitter’s lockup period expired, insiders dumped shares causing a 17.8% one-day drop to $31.85: well below the average investor’s purchase price of $44.50 on IPO day.

Selling early — or holding on for too long?

Parsing through SigFig data, we found that many investors sell their IPO stocks within months of buying. Some 73% of GoPro investors (the company IPO’d less than 3 months ago and is up 180% since then) have already sold at least some of their GPRO shares.

Yet 61% of MediWound (MDWD) IPO investors seem to be hanging onto their stock, despite its 41% drop since its IPO in March 2014.

The takeaway

Warren Buffett himself has said that IPOs are almost always bad investments because of the hype involved. Research suggests that in the long run IPO companies underperform comparable companies.

If you do want to play the IPO game, keep in mind that just like investing in any individual stock, you’re taking a risk on a single company.

As usual, one caveat about our data: it represents the activity of investors who track their portfolios on SigFig. They may not be representative on investors as a whole.

Boomers: This Strategy is Putting Your Retirement at Risk

When it comes to investing, Baby Boomers seem to think that 60 is the new 40.

We recently discovered that only 7% of 51- to 60-year-old investors who track their portfolios with SigFig have allocated enough of their money in bonds to correspond to their risk appetite and investing horizon. And nearly 20% of investors in this age bracket who own target-date funds, have selected funds that are meant for younger investors: an indication that they might be seeking a more aggressive investing strategy that these funds offer.

And on top of that, some of these Boomers are adding even more risk.

Seven of the top 10 most popular securities among target-date fund owners ages 51 to 60 are stock funds. Those include: three growth funds, two value funds, an international stock fund, and an energy sector fund.

Another two of the top 10 picks are balanced funds that invest in a mix of about 60% stocks and 40% bonds. This asset mix is pretty close to where the typical target-date fund would be for this age group, but the balanced funds will stay put at 60-40 instead of continuing to dial down the risk over time.

Finally, about half of the investors in this group own a Fidelity Retirement Money Market Fund (FRTXX). That’s a low-risk choice — but an expensive one in its category. This fund’s expense ratio is 0.42, and, according to Morningstar, the average expense ratio in this category is 0.12. In fact, while SigFig users under 40 are overwhelmingly choosing very low-cost funds, older investors are often paying more than they need to.

It’s possible that investors in this age group are investing aggressively because they saw big losses during the 2008 financial crisis and recession, and they’re trying to make up for lost time. But adding more risk, well, just adds more risk–which does mean more potential upside, but also means risking more big losses.

On the other hand, one fool-proof way to end up with more money in retirement is to spend less of it now, particularly on investment fees. Over the long term, the money you save will make a significant difference in the size of your nest egg.

A couple of caveats about our research:

  • We track data for investors who sync their portfolios with SigFig. They may not be representative of investors as a whole.
  • For non-SigFig data, such as fund categories in the chart above: we believe the data presented was obtained from reliable third-party sources, but SigFig does not assume any responsibility for the accuracy of such information.

Are Millennials Better Investors Than Their Parents?

We hear a lot about the financial hard times and bad behavior of young people. They’re saddled with student loans, can’t get a job, and live in their parents’ basements.

Maybe so. But what about those under-35 Millennials who are able to save for retirement? How do they invest? Are they day-trading speculators, the investing equivalent of Fast & Furious street racers?

Nope. According to our data (based on accounts currently synced with SigFig.com) Millennial investors are better-behaved than their elders on a variety of measures.

Keeping it cheap and easy

Let’s start with one of our favorite subjects: fees. Fee-heavy investments silently take not-so-dainty bites off your nest egg over time.

Millennials tend to select lower-cost investments. Twenty-somethings pay an average of 0.39% in fund fees. (Which is still high, by the way – you could construct a well diversified low-cost portfolio paying just 0.15% in fund fees*.) Older investors pay up to 50% more: investors in their sixties pay 0.58%.

Older investors pay more, in part, because they own more bonds, and bond funds have, on average, higher expense ratios than stock funds. But since you can get a bond index fund for 0.10% or less, that can’t explain the whole difference.

Fewer trades, higher returns

Young investors also trade much less than older ones. The median user in her 20s makes 23 trades per year. Investors age 60–69 trade more than twice as often: 52 times per year.

Why does this matter? More trading is strongly associated with lower returns.

Picking good funds

A couple of weeks ago we looked at the most popular securities by age group. A “security” here can refer to an individual stock or bond, a mutual fund, or an ETF.

Among under-30 investors, the most popular security is Apple (AAPL) – a favorite among almost all age groups. The rest of the top five, however, are all low-cost index ETFs: a total US stock market fund, two international funds, and a bond fund.

There is only one fund in the top five securities held by investors in their 40s. For investors in their 50s, there are none.

What if we look only at the most popular funds and ignore individual stocks? A similar story: older investors are more likely to own expensive, actively managed funds. Over time, those costs add up.

The smart kids

Like we said up top, only young people who actually have an investment portfolio are going to sync it with SigFig. So we may be seeing more of the honor students.

But the same reasoning applies to every other age group. Young people really do appear to be better investors.

Now, if we could just get them to move out of our basements.

*Investors in SigFig’s Managed Accounts pay, on average, 0.15% in fund fees. You can find out more about this service here, or talk to a SigFig advisor.

As Apple Unveils iPhone 6, AAPL Investors Sit on 52% Unrealized Gains

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All eyes are on Apple (AAPL) today as the Cupertino tech giant unveils its new iPhone and the much talked-about iWatch (9/10: oh sorry — Apple Watch). Another subject of regular conversation has been the company’s stock. AAPL is one of the most popular securities among investors who track their portfolios with SigFig – especially after the stock split in June, when 85% of SigFig users who traded AAPL were buyers, vs only 15% selling the stock. Buying activity leveled off somewhat in the weeks that followed, but as seems to be typical of the weeks before a new product launch (see the chart above), it’s been trending back upwards — undisturbed by the nude photo leak scandal of the past week.

Can you blame AAPL investors for holding onto the stock, though? As of September 8, 2014, SigFig users who own AAPL were sitting on an average of 52% unrealized gains.

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One note about this research: As usual, we track data for investors who sync their portfolios with SigFig. They may not be representative of investors as a whole.

When Investors Don’t Act Their Age

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A target-date fund may be the ultimate set-it-and-forget-it option for retirement savers. The idea is, you choose a fund whose “target” retirement age (or date) matches yours. The fund handles your asset allocation for you, gradually getting more conservative as you approach that age. Couldn’t be easier.

But it appears that not all investors use them the way they’re designed.

In the past few years, more and more of Americans’ retirement savings have been pouring into target-date funds. In 2006, only 19% of 401(k) participants had a target-date fund in their portfolio. That year, Congress passed the Pension Protection Act, which made it possible for employers to automatically enroll their workers in a 401(k) and made target-date funds an acceptable default option. By year-end 2012, 41% of 401(k) participants had the funds in their portfolio.

We were curious to see how investors who track their portfolios on SigFig use these funds. Perhaps not surprisingly, the younger you are, the more likely you are to be invested in a target-date fund: 18% of investors between 31 and 40 years old own at least one target date fund from Vanguard, Fidelity or T.Rowe Price (the three firms that dominate the market), compared with only 8% of 51-60-year olds.

As you can see in the chart above, most users – anywhere from 74% to 79% own funds whose target retirement dates hit right around when they turn 65.

But many investors are doing something a little different with these funds. For example, 17% of people 31 to 40 who own a target-date fund own one with a retirement date of 2035 or earlier. They’re either expecting to retire as early as their 50s — or they want a more conservative asset allocation than the typical target-date fund would give them at their age.

Older SigFig users are more likely to veer off the target-date script than younger users. Among users 41 to 50, 14% are looking for a more conservative allocation or, who knows – maybe even planning to retire early. Meanwhile, 13% of investors in this age group are doing the opposite. And 19% of users 51 to 60 have bought funds that are “younger” than they are — either looking to take on more risk than funds aimed at people their age would allow or planning to delay retirement.

A couple of notes about this research:

  • This data is derived from investors who track their portfolios with SigFig and have provided us with their age. It’s possible that these users invest differently than the average investor — or even differently than our user base as a whole.
  • Age is self-reported It’s possible that some users may have provided us with inaccurate information.