So-called “meme stocks” have been all over the news in 2020 and 2021, mainly due to the wild swings in their share prices and the “rags-to-riches” stories that are widely promoted. While some dismiss the meme stock phenomenon as a fad, the truth is that these heavily hyped names can produce tremendous profits to those who are smart or lucky enough to catch them on the upswing. But given the volatility that these shares exhibit, how can you safely invest in them? Here are a few suggestions to help you succeed if you choose to invest in meme stocks.
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Limit Your Exposure
Trading meme stocks can be fun or even profitable if you’ve got a knack or are simply lucky enough to follow along for the ride. But investing for your retirement shouldn’t be a game. While you’re young, trading is a more feasible pastime, as you have both time to fix any missteps and, generally speaking, a steadily increasing income over your career to help supplement any lost investment funds. But even then, it’s foolish to blow away your long-term financial plan with some large, ill-timed investments.
Most financial advisors will recommend that you allocate no more than 5% or 10% of your portfolio to speculative endeavors like meme stocks. Anything more than that and you risk derailing your long-term financial goals. There’s nothing wrong with investing in meme stocks if you understand that they are speculative and you are playing with money that you are willing and able to lose. Consulting with a financial advisor about your long-term investment objectives and personal risk tolerance is a great way to begin if you’re considering going down this path.
Diversify Your Choices
Although investing in meme stocks is something of a “Wild West” endeavor, you can make moves to protect your money while still participating in the explosive upside. One strategy that goes a long way is to diversify your meme stock investments. Putting all of your money into a single stock isn’t usually financially prudent, even if that stock is a blue chip like Apple. But owning a single meme stock is inviting financial disaster. If you want to play in the space, consider spreading your money out across a wide variety of names. While some might not work out, if you hit it big with one name it may more than counteract any other losses you take.
Understand What ‘High-Risk, High-Reward’ Really Means
The expression “too much of a good thing” is normally reserved for treats like candy and ice cream but it also definitely applies to meme stocks. It’s certainly easy to wish you had your whole portfolio in a stock like GameStop when it shoots up 400% in a single week. But the stock market is never a one-way street. Plenty of investors bought in at GameStop’s peak in early 2021 — indeed, that is what helped drive the stock to its record high of $483 — and many of those same investors are still licking their wounds months later, with the stock trading at around $185 in mid-to-late October.
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If you had placed your entire retirement savings in GameStop in January 2021, you’d be sitting on a loss of about 62%. While losing nearly two-thirds of your portfolio is a crippling blow, the way the math works out, things are even worse than they seem. After taking a 62% loss, you’d have to earn 163% on your money — not “just” 62% — simply to break even.
This type of investing exemplifies the meaning of “high-risk, high-reward.” While no type of investing is inherently “good” or “bad,” you have to fully understand what you’re getting into when you buy meme stocks. Enjoy the ride, but keep your allocations limited and understand that any stock that can jump 100% or more in a single day or week is also a candidate for getting cut in half overnight as well.
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