Unwarranted risk.

Don’t put risk before responsibility.

The SpaceX IPO has everyone going nuts. Coming to market at a $1.75 trillion valuation (now even higher than that), it is the talk of the town. No matter the valuation, investors were chomping at the bit to get themselves a slice of the pie.

But some are willing to take more risks than others. I came across this story from Bloomberg last week.

Essentially, this 33-year old saved up $6,500 to allocate to the IPO. From there, she even tried to borrow money from a friend and get a bank loan to invest even more.

As a financial planner, this is an exorbitant amount of risk. Personal loans and borrowing from friends to invest in an IPO brings a ton of potential headwinds. It can stress relationships and it can create a financial hole we have to dig ourselves out of in the event the IPO goes against us.

Usually, any amount of leverage is carefully considered. We help clients with this all the time. Whether it be a HELOC, SBLOC, business loan, or margin loan, these forms of leverage can quickly work against us in the event things go sideways. Leverage amplifies everything. It can begin to look more like gambling than investing when it is not carefully considered.

I can’t know what this 33 year old’s total financial picture looks like, but I can make some inferences. She looked to borrow $5,000 from a friend for this investment. She saved $6,500 for the IPO. In the grand scheme of things, if someone is looking to borrow just $5,000, I would assume that they may not have ample liquidity accessible.

This is where the risk becomes even greater. For argument’s sake, let’s just say that this $6,500 was all she had saved, she has now concentrated her entire net worth into one issue and the next thought was how to borrow to get more exposure to the stock.

To put it in other words, every alarm bell in my financial planner mind was going off as I read the article. To me, this looks much more like a gamble than a responsible investment.

So, how would I have played it?

First off, as a young professional myself, I encourage people to ensure their liquidity is intact. A cash reserve of 3-9 months’ worth of expenses allows us the privilege of taking risks in the market.

From there, I’d consider toning down the amount of exposure. Generally speaking, capping single issue stock at 20% of one’s investable net worth can be considered reasonable depending on their age. For someone that is 33, they have a lot of time. They could recover in the event the stock got crushed given their time horizon. But for an IPO, I’d consider even less of a percentage.

Finally, absolutely no leverage. We’re talking about a $6,500 investment and the consideration of borrowing another $5,000 to invest. If one needs to borrow $5,000 to make that investment, to me that’s all that needs to be said as to why they shouldn’t be making that investment.

Big IPOs can create a whirlwind of FOMO. Imagine getting in on IPO day for a company like Amazon, Apple, Google, Nvidia, or Tesla?! That worked out well for some who were able to endure the volatility and drawdowns.

I’m not against picking stocks. I’ve written about it here. But I am totally against irresponsible concentration that masks itself as a “smart” investment.

Be wary out there, folks! Most are expecting a few more mega IPOs before the year is out. Investing responsibly is key to our financial well-being. An investment in an IPO can go to zero but still be survivable if it were sized correctly. Risk isn’t inherently irresponsible, but without liquidity and careful attention to concentration it can quickly become irresponsible.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.