If 2021 was the year of the meme stock, 2022 feels like the close of that era of investing. The COVID stimulus checks that drove some investors to buy into wobbly companies like Gamestop and AMC have run dry, and digital currencies have lost much of their value over the first half of the year.
The frenzy got millions of people interested in investing for the first time. Now that the party is ending, where do they go from here?
The rise and fall of meme stocks
In 2020, the markets crashed due to the onset of the COVID pandemic. Offices, sports, and every form of live entertainment shut down. People had extra time and, thanks to federal stimulus checks, extra money, but few ways to spend it.
Many of them put it into stocks. And with the market at bottom, stocks had nowhere to go but up. Stocks driven up by social media interest like Gamestop, AMC, and various cryptocurrencies got the most attention, but even the least buzzy investments turned out to be winners.
Take oil. In April 2020, the price of oil went negative, meaning traders were paying people to take it off their hands. [1] If you’ve refueled your car recently, you’ll know how far the situation has flipped. This may have led to a false sense of confidence among some traders who benefited
“When the market is doing well, people tend to feel smart for having participated and even smarter for making a small fortune,” says Bill Brancaccio, certified financial planner and cofounder of Rightirement Wealth Partners.
At the beginning of 2022, after more than a year of almost uninterrupted ascent, the markets finally began to turn, due to worries over inflation and anticipation of the Federal Reserve’s response. [2] Retail investors have largely pulled out of the market, selling off [3] from the last two years.
How meme stock investors can adjust
If you got into the market in 2020, you really couldn’t screw up. But 2022 is different.
“When you’re in a volatile environment, it’s really hard,” Brancaccio says. “I think the amateur day trader is finding the seas choppier than they imagined.”
The easiest adjustment to make is to stop investing in things you don’t understand. Long-term, the safest strategy is to invest most of your money in passively managed, well diversified funds, like index funds, Brancaccio says. If you need help picking one, speak to a financial advisor. Right now, these funds are also losing money along with the rest of the market, but spreading your risk across multiple investments can ensure you won’t lose your entire investment because of one or two stocks.
If you still want to trade individual stocks, make sure you’re using money you can afford to lose, especially while the market is so uncertain.
“If you don’t know what you’re doing with investing, don’t try to be a hero right now,” Brancaccio says. “Be smart. Buy quality. Work with managers that know what they’re doing.”
Image: Sopa Images / Getty Images
