How to Be an Intelligent Investor and Still Invest in Meme Stocks
It depends on what type of investor you want to be.
Since the beginning of 2020, millions of new investors have entered the stock market.
A recent study polled 1,291 households to get more insight into why.
Of these households, 38% reported that they were first-time investors. The survey asked each respondent to identify up to three goals for their investment account. Regardless of experience, the most popular response was saving for retirement. The next two were “learning about investing” and “speculating.”
As someone who regularly writes about the importance of personal finance, I’m ecstatic that more people recognize the importance of investing — but, at the same time, new investors are susceptible to missteps and biases. The “learning as you go” approach is akin to trial and error, while investing purely for the sake of speculation is similar to gambling.
If you’re somewhat new to investing — or the latter two goals apply to your investments — I have a question for you:
Which of the following approaches best describes your investment strategy?
- Creating a risk-optimized portfolio for your investments that aligns with your life goals and timelines. The portfolio could gradually change your life in the next 10–20 years.
- Scouring social media threads in search of the next big, socially-backed investment. The investment could radically change your life in the next few months.
- Do you even care?
Your response reveals a lot about what kind of investor you are.
3 types of investors in the meme stock era
The proliferating wave of investors has ushered in a new era of investing — and investor types:
- The idle investor
- The intelligent investor
- The ignorant investor
Although these connotations are pretty distinct, I want to make something clear: no matter what label an investor falls under, they aren’t guaranteed to experience gains nor losses. The ignorant investor could triple their money in a week — while the intelligent investor could see their portfolio stagnate.
Idle investors
Idle investors are pretty cut and dry. They opened a brokerage account and deposited money — maybe even put some of it in a mutual fund. They may have automatic contributions into a 401k, but, otherwise, they don’t bother with investing. Or, if they haven’t even taken these minimal effort steps, their paychecks pool in their checking account.
If you’re ultra-conservative and oppose the volatility of the stock market, there’s nothing wrong with a cash-focused strategy. Under this approach, wealth doesn’t accumulate at nearly as high of a rate, but it also isn’t exposed to the same levels of downward pressure.
It just depends on your income and life goals. I’ve seen plenty of successful people and business owners take this approach because they simply do not need more money. They make enough income to support their life endeavors, so they don’t bother with the stock market.
Intelligent investors
Intelligent investors don’t scare easily. They base their investment decisions on thorough research. Their trades — however frequent — follow a broader portfolio strategy. They don’t let daily news spur spontaneous decisions. They know their entry points and exit points. They have a timeline and they adjust their portfolios according to it.
Intelligent investors don’t even need deep knowledge or expertise. They don’t need to know the stock market inside and out.
They could take a hands-off approach, get advice from a financial advisor, and strategically allocate their money ETFs based on their research and/or professional guidance. They regularly monitor their investments, but not too frequently to cause distress. They stay moderately informed — but they aren’t glued to market news.
You don’t need to be an active investor to be smart about it.
Ignorant investors
Ignorant investors either scare easily or put themselves in a position where they’re screwed if a downturn takes place again. They load up on speculative and volatile stocks that they heard about on social media without performing their own due diligence.
They invest based on emotions instead of logic. They don’t stick to any sort of plan. They follow the crowd, which can work when things are going well — or fail miserably when things go wrong.
If you’re in the #apearmy, you probably think I’m talking to you.
Well, I’m not. At least, not to every member of your regiment.
Risks can pay off. Speculative investments don’t automatically make you an ignorant investor. The meme stock mania is a prime example — plenty of people have profited. Hell, I dabbled in the GameStop squeeze and got a nice anniversary dinner out of it. These investments can serve a role in the portfolio of an intelligent investor.
However, intelligence morphs into ignorance when speculation becomes the one-and-only strategy for all of your money.
The general standard for speculative investments is 5–10% of a portfolio. If you’re younger (and, thus, have more time to make up the potential losses), that percentage could be higher.
For example, let’s assume you have $10,000 to invest. You’ve already funded a checking account for lifestyle expenses and a high-yield savings account for emergency funds. In that case, you could have more leeway to invest more than 10% of that $10,000.
Your holistic financial situation is generally stable, so you can afford to take bigger risks. (That’s not a recommendation to do so, just an example of taking precautions first.) You might even enter a stop-loss order to protect your downside — although that could backfire and force you to sell too soon if the asset price is volatile.
If you take deliberate precautions to avoid jeopardizing your financial well-being and stability, then you’re not an ignorant investor.
Which investor are you?
If you don’t see the value in investing, no one’s going to make you invest. Stick with your conservative cash-accumulating strategy.
If you want to follow trends and social media momentum without doing a lick of research, go for it — just be aware of the consequences. When you don’t understand what you’re buying and you don’t have a plan, you’re more susceptible to emotionally charged decisions. Putting all of your money in any investment could pay off handsomely or derail your financial stability like a sequoia on a train track. That’s your decision.
If you want to understand your investments and follow a calculated strategy, you can absolutely do that too. This helps you weather the inevitable storms.
There are bountiful resources out there nowadays. You can find relatively simple explanations of anything related to personal finance on Investopedia. Sites like Barron’s and Marketwatch curate information for you. Hundreds of meticulously constructed finance books exist for this very reason. (I recommend the Intelligent Investor if you’re serious about analyzing your own stocks.) You can also scour YouTube for videos if that’s your preferred way to learn.
You can even use social media to find tidbits of helpful information. Remember those investment approaches I mentioned in the introduction? No one said those were mutually exclusive. You could have a well-crafted portfolio and find social-backed momentum stocks for short-term plays.
Speculating can serve a role in your portfolio so long as you’re reasonable about it.
It’s your money though, so you decide.
If you want to understand your stock investments — and know what it means to “understand your stock investments” — sign up for Due Diligence.