Like it or not, social media has the potential to influence a lot of people — but that doesn’t mean you should let it dictate how you invest your money. These days, there’s a lot of buzz about meme stocks — companies that have gained notoriety due to internet popularity.
GameStop (NYSE: GME), for example, blew up the internet earlier in the year when a bunch of Reddit users drove its share price upward, resulting in a world of pain for the hedge funds that got stuck in a short squeeze. But tempting as it may be to invest in meme stocks, the companies behind them aren’t necessarily the most stable or viable, and you may be better off focusing on these options instead.
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Index funds are passively managed funds that aim to match the performance of the market indexes they’re associated with. S&P 500 index funds follow the S&P 500 itself, which is comprised of the 500 largest publicly traded companies.
S&P 500 index funds win over meme stocks for a few reasons. First, they’re naturally diversified — when you buy shares of one of these funds, you effectively get to add 500 different companies to your portfolio at once. Secondly, the companies that make up the S&P 500 are generally established ones, and many have been around for over 100 years. To be fair, GameStop went public in 2002, so it’s not exactly new — but it doesn’t have the same longevity as many other stocks.
Finally, many of the companies in the S&P 500 are positioned for excellent growth. By contrast, today’s meme stocks are more speculative.
A lot of people are drawn to meme stocks because they like the idea of making money quickly. But a better bet is to hold quality stocks in your portfolio that pay you consistently over time. And that’s where Dividend Aristocrats come in.
Dividend Aristocrats are companies that have increased their dividends annually for at least the past 25 years. Owning dividend stocks is a great way to buy yourself some protection in a volatile stock market.
Even if stock values tank, established companies will likely continue paying dividends, so you have that income to offset any other losses you might take. Dividends also give you flexibility — you can withdraw your payouts as you wish or reinvest them to grow more wealth in your portfolio.
Meme stocks may be all the rage right now, but remember, your investment choices shouldn’t boil down to what’s trending or not. Rather, focus on stocks with exceptional value or long-term growth potential.
You should also aim to establish a diverse mix of investments, all the while securing a backup income stream in case life (or the stock market itself) throws a curveball at you. S&P 500 index funds and dividend stocks are a great way to set yourself up for success, so do your best to drown out the internet noise and avoid the meme stock hype.
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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
