Anytime the market is one of the top stories in the news, I definitely get a few client questions in my email inbox. I think it’s a great time to talk about what went on last week with GameStop and a few other stocks that many consider “speculative.”  So should buying speculative stocks be a part of your investment plan? Should I be buying speculative stocks in my portfolio?”

What happened?

Basically, an investor (will call them Mr. Short) shorted a stock (read more on shorting a stock here) hoping it would go down in price, so he could then purchase the stock at a much lower price, therefore giving them a decent gain ($sell price – $ buy price = positive=gain!). He was a very popular trader with a big audience.

A big group of investors on a major internet forum were not happy that the GameStop stock price was projected to go lower. So that group of internet investors decided to get together and buy a ton of that particular stock. When there’s a lot of demand for a stock, the price will go up. And with all those investors buying up as much as they could scrape together, that stock went WAY up.

Some big investors got “squeezed” by the internet buyers jumping into stocks like Gamestop and AMC.

Now Mr. Short is in trouble. The stock he was planning on buying after it went lower now is skyrocketing in price, and he’s forced to buy at a higher price than what he sold it for (at a loss!). Mr. Short purchasing the stock now has added to the demand, driving the price even higher.

To add another level of complexity, shortly after the stock skyrocketed, one of the online trading platforms decided to shut off those investors from buying any additional stock. Those investors weren’t happy and the stock dropped like a rock. This roller coaster ride went on for the better part of last week and raced to the headlines as investors wondered if they should jump into the speculative stock game.

What does this mean to the overall market?

So what does this mean to the broad market and your retirement portfolios? At this point we don’t really know. Most of the stocks involved in this are not part of the S&P 500, so the broad market has not been as affected at this point. It will be interesting to see if some of these speculative buyers start buying into larger stocks down the road.

Should I buy into these stocks?

You need to consult with your financial advisor on this one, as they – along with your tax professional will know your financial situation the best. Generally, it’s not a good idea to invest any more than 5% of your net worth in any one stock position. Your individual situation along with your personal preferences may take this number either direction but that’s a decent rule of thumb.

It’s also usually a good idea not invest in speculative stocks unless you are completely ok with losing the entire amount invested. With so much uncertainty on how these stocks will hold their value and the thought that many of these investors will eventually cash out and take profits (driving the price back down) – I’d be very careful investing to make a quick buck. Again, talking to your financial advisor before you make purchases would be a great idea.

If you have concerns how your portfolio might be affected by what’s going on in the current market. Feel free to email me at Brian@TheAeroAdvisor.com.

Investing involves risk including loss of principal. No strategy assures success or protects against loss. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.