Excited for Snapchat’s IPO? Don’t forget the big picture.
Even if Snap gets off to a good start, its stock may still not be the best choice for you. Here are some tips on deciding whether Snap deserves a place in your portfolio.
—Whether you’re obsessed with keeping your Snapstreaks going or have no idea what that means, you may be itching to invest in this week’s initial public offering of Snap Inc., parent company of the popular Snapchat app.
The appeal is understandable. For users of the app, owning shares of a company you use every day (or hour) can seem like a good investment. For nonusers, the urban legends of get-rich-quick IPOs are exciting enough on their own.
Of course, not every IPO is a success. And even if Snap gets off to a good start, its stock may still not be the best choice for you. Here are some tips on deciding whether Snap — or any highly anticipated IPO — deserves a place in your portfolio.
Consider the risk
When you’re first learning how to buy stocks, a hot prospect like Snap can be appealing. But there’s a lot to consider before you click the buy button.
Key questions to ask yourself include: Are you saving for retirement? Taking advantage of your employer’s 401(k) match? Up to date on monthly expenses? Set up with a savings account to cover emergencies? Free of high-interest debt?
If you answered “no” to any of the above, tackle that first. If you’re buying stocks to make a quick return on money you may need within the next few years (or less), you may be setting yourself up for disaster. Even worse, you may be investing in the market with money you don’t actually have.
Whether you invest in a company that’s been trading for decades or one that’s issuing shares for the first time, the premise is the same: You expect the value will increase with time. Simply put, that’s not guaranteed. Stock prices can fluctuate wildly over the course of years, days or even hours.
IPOs are no exception. You may have heard cautionary tales of the dot-com era, such as Pets.com, which liquidated less than a year after going public. A more recent example is Facebook, which didn’t trade above its 2012 IPO price for more than a year.
Then again, Facebook shares have now more than tripled in value since going public. This type of reward potential, along with the ease of trading, makes stocks appealing to many investors. But beware the flip side of stocks: You could also lose your entire investment.
Don’t lose sight of diversity
Still salivating over one particular stock? Put it in perspective. Ideally, purchases of individual stock should complement an existing, diversified portfolio. Pouring any significant amount of money into one young company’s stock doesn’t generally fit that theme, particularly if that purchase is among your first investments.
Sure, the goal of investing is to grow assets over time. But an equally important consideration is reducing risk so your investment isn’t subject to the fate of one company (or industry).
If you’re new to investing, building a diversified portfolio may seem more daunting than buying shares of a few companies here and there. The good news? It’s not.
If you have a 401(k) or similar employer-sponsored plan, that’s a great place to seek diversity. These accounts typically offer a small list of fund choices, with options for different asset types (stocks or bonds, for example), geographies (U.S., international or emerging markets) and company sizes (from small to large cap).
You can find similar options in an individual retirement account, where exchange-traded funds and index funds offer an easy way to diversify. These funds allow you to distribute money across a variety of companies, industries or asset types — often with relatively low fees.
When an IPO makes sense
There’s nothing wrong with owning individual stocks. During your lifetime you may acquire them in a variety of ways — a gift from a relative or as employee stock options, for example. They could prove to be fantastic or terrible investments, and if you have only a few, they won’t dictate your portfolio’s success or failure. That goes for IPOs as well as shares from established companies.
But if you’re a beginning investor with, say, $5,000 at your disposal, investing it all in one company is risky, especially if you don’t have a long-term strategy in mind. If your long-term strategy is hazy, read up on how to start investing before you jump into any IPOs.
No matter what piqued your interest in investing, consider it a blessing. The road to retirement is long, and you’ll inevitably encounter bumps along the way. But those can be alleviated by managing your risks, diversifying and investing for the long haul.
After all, you don’t want your time in the market to be ephemeral, like the photos on a certain app.
This story originally appears on NerdWallet.
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