FA-IQ reached out to advisors to ask: Should advisors embrace popularity of so-called meme stocks, or should they advise their clients against it?

Faron Daugs, wealth advisor, founder and chief executive officer of Harrison Wallace Financial Group. Libertyville, Illinois-based Daugs has been in the industry for 30 years and has $150 million in client assets.

“Meme stocks have been one of the breakout financial stories over the past year or so. It’s ushered in phrases such as ‘diamond hands’ [someone who has a high-risk tolerance for high volatility stocks or assets] or ‘to the moon’ [confidence in the performance of a stock].

Some meme traders were able to make a lot of money in a short amount of time. Naturally, clients are exploring this trend and asking about the next meme stock to generate those 5x or 10x returns. As a wealth advisor that works with both younger and older generations, I caution clients of any age to avoid speculative investments.

Faron Daugs
As advisors, we have a duty to educate our clients and address all types of market situations — even intriguing fly-by fads. Part of our responsibility is to help clients find or navigate their risk environment. Clients with more risk appetite may be less averse to meme stocks. But clients near retirement might be better off with longer-term stability rather than chasing to-the-moon gains. Because they don’t rely on underlying performance but emotion, meme stocks are naturally volatile. Overall, the valuations are not great — prices are way above what the company earns and in an uncertain market, they provide more downside risk than upside. My approach is to not recommend them. However, if a client insists on riding the wave, I suggest counseling individuals on not investing any more than they would be willing to lose.

This is true of any highly speculative investment. Another is cryptocurrency. When it comes to the media and highly speculative investments, clients have a fear of missing out on the ground floor. Unfortunately, they hear about the many upsides but rarely about the losses. We should be able to help them navigate these new instruments as trusted advisors, rather than taking advice from Reddit memes or YouTube channels.

The meme stock investors that walked away with outsized gains were incredibly lucky. It’s more akin to gambling than investing. They timed the market right and knew when to get out. This invariably leaves others holding the bag. And now that the meme stock is out of the bag, more casual investors will be looking for the next stock, which dilutes the environment. In an already challenging macro environment, the meme stock environment is downright calamitous.

In this environment with high volatility, I caution against speculative assets in favor of more traditional active and passive management investing. It might not provide the moonshot gains some have realized but it has the potential to provide more stability and return in the long term.”

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