Social media has changed many aspects of life, including the ways in which people invest. Specifically, a growing number of investors are hoping to get rich by purchasing "meme stocks" -- those that get a lot of buzz online.
GameStop (NYSE:GME) is probably the best-known meme stock because a group of Reddit users executed a short squeeze that got attention even outside of financial circles. But it's not the only one. In fact, there's even an ETF that trades under the ticker symbol BUZZ that uses an algorithm to identify and invest in companies that are top subjects of online discussion.
While it may be tempting to try to capitalize on the meme-stock trend (especially if you've heard about people getting rich doing it), the reality is that buying shares of companies based on social media attention is an extremely high-risk proposition that's unlikely to pay off in the long run.
The good news is, you don't need a meme stock to strike it rich. Instead, there's a really safe investment anyone can buy that's all but guaranteed to double your money.
This is a better bet than a meme stock
So how can you double your money in the market without taking the risk that a meme stock presents? It's simple: Invest in an S&P 500 index fund. You can buy an ETF that tracks the S&P 500 and you'll immediately own a small piece of all of the large U.S. companies that make up this financial index.
The S&P 500 is basically the opposite of a meme stock. It's as close to a sure thing as you can get, while picking stocks based on social media buzz is about as reliable as the medical advice you'd get from Facebook comments.
The S&P 500 has a very long track record of producing positive returns over time. In fact, from 1971 to 2020, the S&P 500 produced an average annual return of 10.9%.
Not only that, but in 40 of the past 50 years, it gained in value. And if you invested in the S&P 500 at any time and left your money alone for at least two decades, you'd have made a profit -- no matter how poorly you timed your initial investment.
Long-term thinking pays off
The problem with meme stocks is that most of the time, the price of shares rises not because the company is poised for growth or even because it has solid financial credentials. Instead, these stocks go up solely because people are talking about them.
And when the attention fades, the price of the stock will inevitably fall. So unless you get in and out at exactly the right moment, you're much more likely to lose money than to double it.
By contrast, the chances that you'll suffer big losses in the S&P 500 are very slim, especially if you leave your money alone for a while. After all, you're investing in the biggest companies in the U.S. that, together, account for 80% of the entire stock market.
Now, this kind of investment isn't going to double your money overnight. But it will do so faster than you think. In fact, it'll take you around 6.7 years to double the money you invested in the S&P 500, assuming you earn that 10.9% average annual rate of return.
Waiting for 6.7 years isn't as fun as jumping on whatever stock you heard about on Twitter. But consistently watching your investments double over time will be a lot more enjoyable than watching your portfolio balance fall when the buzz around your meme stock fades.