GameStop's stock collapse burn you? 5 ways to get back on track
Investing in "meme stocks" was a tough lesson for some people.
If you're careful, you might get some of it back.
GameStop stock became all the rage in late January after shares of the video game retailer shot up by more than 1,400%, peaking at $483 apiece on Jan. 28. Traders on Reddit spurred the jump in GameStop and other companies, such as AMC, BlackBerry and Koss, and those shares became known as "meme stocks" due to their ties to the online investment community and their exceptional volatility. But as rapidly as these shares shot up, they came crashing down, leaving a lot of people in the red.
More people are investing thanks to no-commission apps such as Robinhood and Webull, but there are risks when playing the stock market . There are some who capitalized on the GameStop roller coaster, while others lost more than they expected. That money might be gone now, but through a better investing strategy, it could return.
Since the beginning of February, GameStop and other meme stocks have only gone downhill, with the exception of the recent bump. Instead of liquidating your entire portfolio and just chalking it up as a loss, it's possible to change the negative into a positive by following some simple steps.
Don't chase your losses
Just like in gambling, there's an urge to recover your lost money fast. In the case of investing, this can mean putting in more money, or even borrowing, to make one or two big moves you hope will get you back into the positive. This can be dangerous.
"If you feel an investment is worthwhile, and you have the risk capital, you should do it," said John Payne, senior futures and options broker with Daniels Trading in Chicago. "But never do it for the sole reason of recovery of what you have lost on a past trade. Every market decision needs to be independent of the one prior."
Even though you may've lost a lot of money fast, getting your portfolio back into the positive may take some time -- and that's OK. It could be months until you recover, but if you chase the money that's already gone, you could find yourself in a deeper hole.
Resist investing FOMO
Professionals recommend that you try to separate emotions and impulses from investing decisions. Fear of missing out, or FOMO, is hard to resist, but it can be costly if you give in to it.
"A lot of people saw these stocks going up, as well as seeing many on their social media feeds making money, so they jumped in," Payne said. "I imagine many will be talking about how much money they made while others are left holding the losses."
Experts suggest making decisions based on the data you have. Research where you're putting money and why. Though the GameStop example flies in the face of this, fundamentals and financials usually do matter to a stock's value. Don't throw money at a stock just because it's trending on Twitter.
Segment your portfolio
Diversifying your stocks is one thing professionals say is key to making gains in your portfolio. Putting everything into GameStop, or any one company for that matter, is a dangerous risk.
"Rather than looking at your entire investment account as a 'big 'pie,' segment it into two or three slices," said Faron Daugs, CEO and founder of Harrison Wallace Financial Group.
Daugs says to have one slice of your portfolio dedicated to long-term investments that you want to hold onto for years. Another slice should be for stocks that are a bit shorter-term, like a year. Then if you can, have a third part, with money you use to play with stocks that are doing well in the short term, such as a few months or weeks.
Understand why a stock is 'in play' and moving quickly
The stock market can be confusing, but changes usually happen for a reason (though it may not be so clear at the time). A sudden spike in a company's share price can be linked to a certain bit of news that got investors' attention. Learning about those bits of data is important to getting back in the positive.
"If you have a good understanding of why a stock is moving, you will also have a better idea of the risks involved in buying the stock," Daugs said.
GameStop's rise was atypical. It was unprecedented and something you couldn't predict just by looking at the data. In his testimony before the House Committee on Financial Services, Robinhood CEO Vlad Tenev said the stock's performance is what's referred to by analysts as a five standard deviation, or five sigma, event and has about a 1 in 3.5 million chance of happening. As a whole, fundamentally, the company wasn't doing well and was sitting in the range of $15 to $20 a share in early January. When the shares blew up, people jumped on without knowing that a confusing play by some hedge funds served as the catalyst. Some people didn't see that this was going to be a real short roller-coaster ride.
"Typically, these stocks are not moving because they have all of a sudden improved their businesses and are expected to be more profitable," Daugs said. "These are moving trains that can jump off the tracks quickly. You do not want to be the last one off, because eventually stocks will return to their 'true valuations.'"
Don't be too greedy
There are no guarantees in the stock market. The fall of the meme stock perfectly encapsulates that point. There simply comes a time when you need to show some discipline and avoid being greedy.
"Be disciplined and have a sell strategy," Daugs said. "Have a price in mind for both the potential up- and downside of your stock."
If you find yourself in a situation where you're up big, always be ready to hit the brakes when things appear to be going south. There's nothing gained by holding a stock that's trending downward longer than everyone else.