Is your portfolio made up of all the most popular stocks? You may not get the returns you’re hoping for.
You’re probably wondering what’s going on at Cabot. Why are we telling you not to invest in some of the most popular stocks on the market? Some of them have had pretty darn good returns over the years. Just look at Microsoft (MSFT) or Alphabet Inc. (GOOG) if you need proof. In the last three years, Microsoft has gone from around 100 per share to over 265 per share, and GOOG shares have more than doubled. Good luck finding a 401k that doesn’t have both of them among its holdings.
Yes, they are two of the most popular stocks on the market. There are dozens more popular stocks that are as stable and profitable as these, and that do belong in your portfolio. These also aren’t the stocks people are talking about around the dinner table, at backyard cookouts, or on Twitter. They are high-quality stocks, but they don’t bring out the WOW factor.
No, the stocks that get the spotlight and the press are the ones like GameStop (GME), AMC Entertainment Holdings, Inc. (AMC), or Dogecoin (DOGE), although it isn’t technically a stock, but a cryptocurrency. Unfortunately, most popular stocks like these won’t give you what you’re looking for. There are reasons for that.
[text_ad]
3 Reasons to avoid the most popular stocks on the market (unless you have money to burn)
While stocks like Microsoft could potentially make you wealthy if you invest enough in them at the right time, many of these well-known stocks aren’t growing that quickly. The Coca-Cola Company (KO), for example, is another stock that’s probably in your portfolio, but its share price has only increased by about 65% over the past 10 years, or about 6.5% per year. Of course, Coca-Cola has other things going for it, like a steadily increasing dividend, but that’s another story.
But Microsoft and Alphabet aren’t very affordable for most people. Even $25,000 invested in Microsoft three years ago would only give you $62,500 today, which isn’t enough to retire on. Let’s explore GameStop for a moment, though.
Leaving aside the WallStreetBets Redditors, all the issues with Robinhood, and even ignoring the fundamentals for a moment, GameStop, like most popular stocks in this social-media-fueled category, gave some investors a nice bump in the bank account. GameStop issued its last dividend payment back in March 2019 as its stock price plummeted. It had been declining for a couple of years at that point, and by August 2019, it was under 5. It reached a low of 2.57 in April 2020.
Here’s where the story gets interesting. Trading volume went up more than tenfold in January 2021, and the stock reached a high of 483 toward the end of the month. That’s an 18,693% increase! One hundred shares would have netted you a little over $48,000. This is precisely why stocks like this are so popular. Herein lies the problem, and the first reason why the most popular stocks don’t belong in your portfolio.
1. You can lose a lot of money. Yes, some people did get rich with GME stock. Many other people sunk their savings accounts into the stock while it was climbing, only to have the stock drop off a cliff a few days later. Since then, the stock has been a bit of a roller coaster. But when you jump on stocks like this, there’s every chance you could buy just before the ride is over.
2. The hype builds up a stock to excessive valuations. IPOs are a prime example of this. One example comes from Snap Inc. (SNAP). SNAP stock came public to much fanfare in February 2017 before completely melting down in the wake of this overhyped IPO, falling from 27 to 11 a share in its first six months of trading.
3. Too much rides on the cult of personality. Dogecoin is known for its irreverent approach to cryptocurrency. It also has some big-name fans like Elon Musk of Tesla fame. At the beginning of 2021, Dogecoin was trading for less than a penny. It was at six cents by early April, and by the end of the month, it was up to 33 cents. Then Musk went on Saturday Night Live. In the lead-up to the show, Dogecoin jumped to 75 cents. So while not every investor can afford to buy enough $50 stocks to make a considerable profit, $50 invested in Dogecoin at the beginning of 2021 was worth something in the range of $6,000 by early May, depending on exactly when you bought or sold it. That’s not a bad ROI!
The problem? Musk made a poor joke about Dogecoin on the show, and it immediately dropped. When a one-liner can ruin your investment, that’s a bit of a problem. The “value” clearly goes beyond any actual financial factors.
So I shouldn’t invest in these stocks?
As you can see, one of the attractions of some of the most popular stocks out there is the fact that you could land a big payday without putting a lot of money at risk. There’s certainly nothing wrong with that if you have money you can afford to lose. Who among us doesn’t wish we had gotten in then out of GME at precisely the right time?
It’s also entirely possible that any of these stocks could be great turnaround candidates. We’re using them strictly as examples here. But by all means, have some fun and take a chance. Investing should be fun. Just don’t go all in with your retirement account or your life’s savings. If you expect nothing, there’s nowhere to go but up!
For your more serious investing, however, follow us here at Cabot Wealth Network. There is a lot of free advice on our website and several free reports you can download and read. And when you’re ready, we also offer a wide range of award-winning investment advisories where we share the latest investing information and tips.
What is your opinion of popular stocks like these? Do you hold any of them in your portfolio?
