This year, we've seen several seemingly poor investments skyrocket in popularity almost overnight. First, it was GameStop (NYSE:GME), then it was Dogecoin (CRYPTO:DOGE) and most recently, AMC Entertainment Holdings (NYSE:AMC). Despite the fact that Dogecoin's co-creator and AMC's management discouraged people from investing further, many have continued to pour their savings into these assets in the hopes of striking it rich -- and some of them do.
Does that mean you should bet big on the next meme stock? Before you make that call, there are a few things you should know about what it takes to become a meme stock millionaire.
A step-by-step guide to becoming a meme stock millionaire
The first step to getting rich off meme stocks is to choose the right company to invest in, ideally before too many other investors drive up its price. A lot of meme stocks have first risen to popularity on Reddit, but not all the stocks you'll find mentioned there have taken off like GameStop and AMC.
There's more luck involved with choosing a meme stock than there is with choosing a stock to buy and hold for the long term. Meme stock share prices are fueled by social media interest rather than the company's underlying value, and there isn't an easy way to predict when that interest is going to move onto something else.
If you want to make a fortune off a meme stock, you probably still have to invest a substantial amount of your own money. If you'd invested $1,000 in AMC stock at the beginning of the year when it was trading for $2.33 a share and sold right at the peak of its popularity on June 1, when its share price hit $62.55, you would've ended up with a little under $26,900. It's not a small chunk of change, but you're not going to be retiring on it, either.
Those who actually make millions off meme stocks often sell their other investments, put all their savings into the stock, or even invest on margin. When these big risks pay off, we hear about them in the news, but when they don't, these investors get wiped out and some may even find themselves in debt.
Finally, you have to choose the right time to sell your meme stock shares, right at the peak of the craze. But that brings us back to the problem we discussed above: It's impossible to know when the current meme stock will be usurped by a new one. Since the company's actual performance has nothing to do with its current share price, you can't look to it for guidance on whether you should buy or sell. You just have to guess and hope you're right.
The underlying thread through all of this is risk. If you want to become rich off of meme stocks, you have to be willing to take enormous risks with your money. For most people, it's just not a good strategy. There are too many things that could go wrong.
What are some alternatives to investing in meme stocks?
If you want to grow your wealth over the long term, there are plenty of safer ways to do that. A great option for most investors is an index fund. These are bundles of stocks that are designed to mimic a popular market index, like the S&P 500. They contain the same stocks as the index in roughly the same quantities to generate a similar return to the index itself.
Since index funds are trying to copy an index, not beat it, there's not as much work for fund managers. That translates to lower fees for investors. In fact, some of the best S&P 500 index funds only charge $3 per year for every $10,000 you invest. And over the last 30 years, the S&P 500 has generated a compound average annual growth rate of 10.7%.
More experienced investors may prefer picking their own stocks, but if long-term wealth is your goal, it's typically best to focus on established companies you believe will perform well over the coming decades. Base your decisions on the company's products and performance, rather than social media hype, and try to stick to those whose business models you're familiar with. This will help you better identify red flags that indicate when it's time to sell.
It will take longer to grow your wealth this way than if you bet successfully on a meme stock, but you won't have to worry as much about losing the wealth you've gained if you focus on established companies. For most people, this is the superior investing strategy.