GameStop Stock Has Crashed and Burned – How to Recover If You Went All In
Meme stocks, or investments popularized by retail investors based not so much on a company’s true valuation but on internet memes, had their day — or week — in the sun. And then, as many investors and experts predicted, they crashed. Hard.
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GameStop stands as the most well-known of the 50 stocks that Robinhood put on a “restricted” list, according to Bloomberg. At its peak, bolstered by the social media efforts of a subreddit group called WallStreetBets (r/WSB), GameStop had achieved a market cap of $25 billion, up from $300 million in August 2019, according to Forbes. By Feb. 4, as meme-stock mania began dying down, GameStop’s market cap plummeted to $6.5 billion, Forbes wrote.
And while many hedge funds, most notably Melvin Capital, lost billions of dollars in days from shorting the stock prior to its peak, retail investors collectively lost billions when the stock’s value crashed. CNN Business reported that Melvin lost 53% in January, requiring a $2 billion bail out by hedge fund Citadel.
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But for the retail investors who lost their hard-earned savings, there was no bailout. If you lost money betting on meme stocks this year, you can take some steps to soften the blow.
“For every investor who made a profit on meme stocks like GME and AMC, there are many others who are now in the red,” said Tony Molina, CPA and senior product specialist at fintech company Wealthfront. “I know from experience that it doesn’t feel good being on that side of the volatile market.”
Fortunately, there are a few things you can do if you’ve lost money day trading in 2021.
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Off-Set Other Capital Gains with Your Losses to Reduce Your Tax Bill
The good news is it’s still early enough in the year to do some smart tax planning. “If you’ve already sold your investments at a loss or are planning to, you can harvest those losses and use them to offset any capital gains you may have from other investments,” Molina said.
For instance, if you’re selling a home at a profit, your stock losses can help offset your gains. Similarly, if you are planning to sell other stocks while they are still trading high, your meme-stock loss can offset the tax liabilities. “This is called tax-loss harvesting and [it] can offset investment gains as well as up to $3000 in ordinary income,” Molina said.
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Create a Savings Plan for the Future
Many people who decided to jump on the GameStop bandwagon manifested money quickly when they decided they needed it most. Some cashed in other stocks they’d been holding, some tapped into savings and some just did without take-out meals for a few nights to join stock-meme mania in hopes of coming out ahead.
Consider putting this level of commitment into bolstering your long-term savings account by developing good savings habits and a plan to save. Experts typically recommend having three to six months’ worth of living expenses stashed away in an emergency savings account.
“Finding a bank with special, high-interest savings accounts that offer better yields is a good idea,” said Mark Nicholson, marketing director for Match Financial. “You might look at options where opening additional accounts is of little or no expense, so that you are able to balance your budget by having different accounts to move money around for saving. One might be for emergency expenses, while others might be for a big purchase, a trip fund or something else.”
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Don’t Swear Off the Stock Market
As you work on creating a long-term savings plan, you don’t have to swear off the stock market entirely, Molina said. “Instead, this is a great opportunity to rethink your investing strategy and diversify your portfolio. Investing in a globally diversified portfolio of ETFs is a time-tested strategy proven to produce returns while minimizing risk, and there is no stock picking or manual trading required.”
While it’s okay to hold onto or buy a few of the so-called “meme stocks” because you’re a fan of a certain company and want to support it, think of this as a purchase, not an investment. After all, it’s exciting to own a small piece of an innovative company like Disney or Tesla. But tuck the stock away and forget about trying to time the market for a fast and profitable sale.
“It’s important to remember that only 1% of day traders make money long-term,” Molina said. “If you’re investing for your future, you should invest the majority of your portfolio diversified across the global market.”
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