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Meme stocks have taken the world by storm, with companies like GameStop (NYSE: GME) and AMC Entertainment Holdings (NYSE: AMC) earning record-shattering returns earlier this year. These investments can be tempting because any investor would be eager to earn such lucrative returns.
But meme stocks can also be incredibly risky. They’re famous for their unexpected growth, and their stock prices often don’t match their underlying business fundamentals. Most meme stocks are struggling companies, and their stock price increases are driven by retail investors buying shares in droves rather than by organic growth.
That said, it can be tough to ignore the appeals of meme stocks. If you’ve decided to invest, here are a few strategies that can help keep your money safe.
Image source: Getty Images.
1. Only invest money you can afford to lose
Regardless of which stocks you choose, it’s important to make sure you can afford to invest right now. If money is tight and you’re having a tough time paying the bills, it might not be the best time to invest.
This is especially true, though, when you’re buying meme stocks. Because meme stocks’ price increases normally don’t align with the company’s fundamentals, these investments are prone to major price swings.
GameStop, for example, saw its price surge by close to 800% in roughly one week back in January of this year. Just days later, it lost around 85% of its value. This volatility can be tough to stomach, and there’s a good chance you could lose money with meme stocks. So if you choose to invest, only invest what you can afford to potentially lose.
2. Make sure the rest of your portfolio is strong
Putting all your eggs in one basket is a dangerous move when investing, and it’s even riskier with meme stocks because they can be so volatile. For that reason, it’s a good idea to make sure the rest of your portfolio is made up of solid investments.
Exactly how many stocks you should own depends on your investing strategy. If you’re investing in individual stocks, aim to buy at least 10 to 15 different stocks from multiple industries. If you’re investing in mutual funds or ETFs, each fund might already contain hundreds or thousands of stocks from a variety of industries, giving you an instantly diversified portfolio.
Owning enough stocks is only half of the equation, though; it’s equally important to make sure those stocks are strong. Healthy companies have solid financials, a capable leadership team, and a strong competitive advantage in their field. These stocks are more likely to grow over time and survive market volatility, and the more of these companies you have in your portfolio, the better you’ll be able to offset any potential losses involved with meme stocks.
3. Don’t expect to get rich overnight
The most significant appeal of meme stocks is that they have the potential to earn explosive returns overnight. While it’s true that you can make a lot of money in a relatively short period of time, it’s harder than it looks to get rich with meme stocks.
To make money with meme stocks, you’ll need to invest early when the price is still low. But because these investments tend to experience significant growth in a matter of days, you can’t afford to wait too long. Not all stocks will earn returns as meteoric as GameStop, though, so if you invest too early, you might end up buying a stock that goes nowhere.
Selling at the right time can also be a challenge. If you sell too early, the stock could continue to skyrocket and you’ll have missed out on those gains. Wait too long to sell, though, and the price might have already crashed.
This isn’t to say that it’s impossible to make money with meme stocks. Just don’t go into it with the expectation of becoming a millionaire, because that’s an incredibly difficult goal.
Meme stocks are one of the most trendy investments right now, but they can also be dangerous. If they’re the right choice for you, make sure you’re taking steps to protect your money. And if they’re not the best option for you, there are plenty of other investments out there.
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Katie Brockman 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.
