The truth about meme stocks and why you should avoid them

With a wide range of asset classes hitting all-time highs, sections of the market are once again gripped by social media-induced speculation.

Headlines about the trading frenzy with Opendoor shares in the US had eerie similarities to the GameStop saga where retail investors used leverage and social media to drive up the prices of out-of-favour listed companies.

For many investors, the temptation to chase these trends and the illusion of quick riches remains strong.

Silence the fear of missing out

FOMO - fear of missing out - around outsized returns caused by the false allure of social media-fuelled momentum can be powerful.

However, all the available evidence tells us that attempts to time the market often leaves investors nursing losses and further from their financial goals than when they started.

Recent data from the US shows a sharp rise in call option activity, short interest in individual companies and high trading volumes in selected out-of-favour listed companies.

Some commentators have pointed to these as examples of speculative excess by online-based stock traders, often those found in corners of social media who treat the share market as an opportunity to gamble, rather than a means to build long term wealth.

Think long-term

It is at times like these that investors must remember that wealth creation is a long-term journey, not built on hype, but on discipline and a considered strategy grounded in long-held investment principles, namely diversification, keeping costs low and employing proven techniques like dollar-cost averaging.

Long-term investing isn't just safer than speculative trading, it's also smarter.

Longer term, investing allows investors to harness the natural compounding power of the market, avoid emotional decision-making, and build portfolios that reflect their goals and objectives.

Diversify, diversify, diversify, 

A well-constructed portfolio is central to this investment strategy. Diversification across asset classes, sectors, and geographies helps turn down the noise associated with volatility.

While single stocks have a place in a portfolio, ETFs are a great way to obtain diversified exposure to asset classes, investment styles or themes. They help remove stock-specific risk that is inherent when buying shares in a single company.

Cost also plays a critical role in long-term outcomes and investing success. High fees can erode returns, especially over time.

Keeping costs as low as possible, and eliminating them where possible, particularly when it comes to brokerage, allows investors to keep their hard-earned capital working towards their goals.

Implementing regular portfolio contributions is another way to build long term wealth.

Even professional money managers often look to contribute to portfolio positions over time by employing a dollar cost averaging strategy.

Making contributions over time, rather than taking concentrated bets, allows investors to smooth out the investment journey and help build a portfolio that doesn't keep you up at night worried about volatility.

Ignore the speculation

Ultimately, building long term wealth is about opening to door to greater aspirations like buying a house, starting a family, and saving for retirement.

A wealth creation strategy that aligns with these broader goals is the real ticket to success.

So while speculation may be back in sections of the market, investors should look to avoid the fool's errand of levered bets on shares subject to social media hype. This approach is likely to leave an investor nursing losses and further from their long-term goals.

For this reason, it is crucial that investors focus on what works, using the right tools to take advantage of hard-won lessons around the importance of diversification, keeping costs low and automating investing decisions.

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