GameStop Made Everyone Think They Could Be a Wealthy Investor
The subreddit known as "WallStreetBets" will surely be written about in economics and business textbooks well into the future. This is because of the massive influence it created in the early months of 2021. One of those favored stocks was the video game retail company GameStop. The folks at WallStreetBets wanted to see this company's value rise both because many on the subreddit happened to be fans of the business itself, but also because they noticed that there was a massive amount of short interest (i.e. people betting on the decline of the stock) at the time. The Reddit mob decided that they wanted to teach short-sellers a lesson.
The stock soared from a price of around $20 per share all the way up to around $500 per share at some points. At the time of this writing, the share price is still highly elevated compared to where it was prior to Reddit's involvement. However, there is a dark side to all of this action with meme stocks. It might just lure in certain people who really have no business getting involved in the stock market.
Certain investors who made a lot of paper profits have also lost a lot of that money on the way down. It has been a turbulent and troubling ride for many, and it goes to show once again that stock market investing is not for the faint of heart. CNBC.com reported that one well-known Reddit user lost $13 million dollars when GameStop stock turned south in early February:
Keith Gill — who goes by DeepF------Value on Reddit and Roaring Kitty on YouTube — says he suffered a loss north of $13 million alone from his GameStop bet, but he's still not selling.
He's the man who helped inspire the epic short squeeze in GameStop last week that sent shockwaves through Wall Street. Through YouTube videos and Reddit posts, Gill attracted an army of day traders who cheered each other on and piled into the brick-and-mortar video game stock and call options, creating a massive short squeeze as the shares jumped 400% last week alone.
Those are wildly outsized profits and losses compared to what one might typically expect. It is unfortunately giving a lot of people all the wrong ideas about what it means to be an investor. People are not sure how much they might expect to generate from their own trades.
Avoid the Hype of Meme Stocks With Concrete Facts and Figures
The best thing to do for one's portfolio may be to turn off the financial news channels entirely when you are thinking about your investment strategies. It is low-hanging fruit for the financial news channels to put up stories like the one described above. Those types of stories get the attention of an audience and produce plenty of clicks for financial websites. However, they are not the typical experience of the average investor. Instead, average investors should focus on what they can actually generate realistically and long-term.
The Standard and Poor 500 (S&P 500), which is considered the benchmark for the stock market as a whole, has produced annualized returns of approximately 10-11% each year from 1926 to 2018 according to historical records. This means that an investor that buys something as boring and unoriginal as an S&P index fund can expect to make 10-11% per year over the long run. Yes, there will be some years when their funds decrease. However, there will also be some years when they see their funds grow by 20%, 30%, or more. Overall, the average comes out to somewhere around that 10-11% mark. That is significant when considering the amount of money that one can put into the stock market. It is the basis from which many are able to generate enough wealth for themselves that they can retire comfortably.
A steady 10-11% growth rate is a lot more comfortable to most people than the wild swings of meme stocks. It is just far too easy to lose a large portion of one's nest egg by mistiming the market and purchasing a meme stock when it is hitting its high watermark. No one is able to consistently pick the exact right moment to purchase stock over the long run, so it is not worth even attempting to do so. Instead, the safer method is to place money in low-cost index funds and allow the averages to do their work.
Meme stocks can be a trap you want to avoid when investing in the stock market. Learn more about implementing a long-term investing strategy.
Learn More About Meme Stocks
Those who absolutely cannot get away from their investing lives might want to consider purchasing stock. These are much riskier than just investing in the broad market. However, they can allow an investor to dip their toes into some speculative waters without getting too far. However, should one decide to do this, avoid picking the meme stocks. Those names are too volatile and can move too aggressively based on news stories. Instead, steer for clear waters and the safest types of investments that you can find.