Jim Cramer says to avoid this 1 type of stock if you want a shot at a secure retirement. Does your portfolio make the cut?

“Trolling the internet for ‘meme’ stocks like GameStop and hunting for short-term victories in the hope of long-term financial stability is an easy road to disaster,” he told CNBC. (1)

What exactly is a meme stock — and why is it risky?

A meme stock refers to a company whose share price skyrockets not because of business success, but because it’s gone viral online. Investors flood in based on social-media hype or buzz in an online forum like Reddit — not necessarily because the company’s fundamentals are strong.

GameStop (GME) is the classic example. (2) In early 2021, a wave of retail traders (largely coming from the subreddit r/wallstreetbets) pushed the stock price up by 1,600% in two weeks — a surge known as a “short squeeze.” (3) By April 2024, however, GameStop was hovering around $10 a share and investors who got in late lost thousands.

The danger with meme stocks lies in the “greater fool” theory, which holds that you can profit from an overpriced stock as long as there’s a “greater fool” willing to buy it from you later.

“When you buy the kind of stock like GameStop, that is just literally a musical chairs game,” Cramer told CNBC. “And I’m against musical chairs and I’m pro-investing.”

In other words: when the music stops, someone’s left without a seat.

The danger of building your investment portfolio based on hype

Cramer’s critique isn’t just about meme stocks — it’s about behavior. Investors who allocate too much of their portfolios to trending or speculative stocks risk being overexposed when sentiment shifts.

These trades often have a clear beginning and end: they rise fast, peak dramatically, and crash just as quickly.

When considering what kind of transaction you want to make, Cramer said, “If it has a beginning and an end, I say don’t own it, because I want owning. I don’t want trading.”

When portfolios lean too heavily on short-term bets, several things can go wrong:

• Timing risk: If you enter the market too late, you could buy near the peak and lose big when prices correct.

• Concentration risk: If your portfolio is too concentrated on specific stocks or companies, you increase your market risk. According to T. Rowe Price, you’re in a concentrated position when any holding represents 5% to 10% of your overall portfolio.

• Emotional risk: Viral stocks can fuel regret aversion, also referred to as the fear of missing out (FOMO), on the way up and panic selling on the way down.

• Opportunity cost: When you allocate funds to speculative and short-lived bets, you miss the chance for stable or long-term compounding growth.

Cramer’s metaphor of “musical chairs” captures it perfectly: when you rely on luck and timing instead of business fundamentals, your portfolio becomes a guessing game.

What investors should prioritize instead?

Cramer’s philosophy is simple: trading is for professionals, but investing is for everyone.

That doesn’t mean you can’t own speculative stocks at all. Cramer recommends putting about half of your portfolio into passive mutual funds or ETFs that follow major U.S. indexes like the S&P 500. (4) The rest should go into a few individual stocks — mostly solid growth companies, with room for one or two speculative picks if you’re just starting out.

“I like you to get in, and, if it’s an excellent company, you stay in,” Cramer says. “But GameStop was not a good company. That was simply people who were chasing.”