What the GameStop chaos means for your investment strategy

The wild trading volatility of GameStop Corp. jolted the stock market and weakened trust in commission-free trading platforms. In the aftermath of the market-moving events—which highlight the shortcomings of short-sellers, the outsized influence of online forums like Reddit's WallStreetBets, and the great financial risk taken by retail brokerage firms—plenty of insights have surfaced.

However, experts say that investors who follow tried and true strategies shouldn't be at financial risk.

"For everyday investors, the GameStop madness really won't mean much," says Ryan Maestro, founder of investment resource provider WantFI. "If they've been following the standard investment advice over the last twenty years, they will be fully invested in index funds, and the short squeeze volatility attacks won't have much of an effect on their portfolio."

Shock to the system

Still, the market turbulence caused by this episode is concerning.

The reverberations—massive sell-offs, locked trades, and other imposed retail investing limitations—could have upended the system, warns George Papazov, a former licensed trader who established TRADEPRO Academy in 2012 to inspire, educate and empower home investors.

"We were close to a really bad situation, which would have brought down the entire market," he says.

Back to the basics

With uncertainty elevated across capital markets, and rising concerns of overvalued stocks and inflation, financial advisor Mark Armbruster says now is the time to diversify your investment portfolio.

"Spreading your investment dollars across several asset classes, but also across a variety of geographies, industries, and currencies is more important than ever," says the president and CEO of Armbruster Capital Management Inc. in Pittsford, N.Y. "A sprinkling of bonds will help protect against a recession. Stocks and real estate investment trusts should outpace higher inflation. Foreign holdings help hedge a depreciating dollar. Value stocks could provide downside protection if growth stocks falter."

Commodities, gold, and small allocations to digital assets could improve returns, he adds, particularly if an era of flat returns develops, akin to the 2000s.

Stephen Caplan believes long-term money should be invested in a well-diversified, traditional portfolio aligned with a specific time horizon and risk tolerance.

He's fine with clients setting up a "play account," ideally less than 5% of their investment portfolio to gamble on risky stocks and chase speculative returns.

"If using a small portion of your money to try your hand at stock picking prevents you from making huge mistakes with your long-term money, such an account can play an important behavioral role," says Caplan, a financial adviser at Canton, Mass.-based Neponset Valley Financial Partners, a wealth management firm outside Boston.

Dysfunction in the digital age

The recent developments are emblematic of a deeper societal problem, according to finance expert Asher Rogovy.

"Much of the market analysis seen on WallStreetBets continues to rely on misinformation or disinformation and stale data," says Rogovy, chief investment officer of New York City-based Magnifina LLC, an SEC-registered investment advisor. "It is very troubling that so many people trust anonymous message boards over financial news services and investment professionals."