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Why you should stop taking investment advice from social media

Sunniva Kolostyak  |  15 Jun 2021Text size  Decrease  Increase  |  
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I am a big fan of social media – I use it to decide which clothes to buy, what food to eat, and even which landmarks to visit on holiday. So, it felt natural to let these online platforms tell me which assets to invest in too, especially after seeing how much money some people made in January.

Unsurprisingly, I have not been alone in starting my investment journey this year. Younger investors have been flocking to investment apps for the first time, with one in 10 Generation Zs (Brits born between 1997 and 2015) starting to invest as a direct result of the GameStop saga. And while I'm technically a millennial (just about) rather than a Gen Z, I completely get the appeal.

In the past 12 months, 16% of British Gen Zs have started investing, according to research from UK-firm F&C Investment Trust. Of those, 62% decided to invest in volatile “Reddit stocks” and 61% were planning to take riskier decisions, making it clear that younger people see social media as an effective tool for financial advice.

But while it is great that people are seeing the benefits of investing – and technology is doing a good job in democratising financial services – a lot of people are falling into the trap of being overconfident, overly trusting, and are not doing their own research. And these mistakes could be costly. For example, F&C saw that 49% of Gen Zs made money on the GameStop volatility, but 29% lost money, and 22% broke even.

Lessons learned

Overconfidence is one of the most common behavioural biases among investors, and it is also particularly common in younger generations and the financially vulnerable. This tendency drives people to overly trust their own abilities or a piece of information when making a decision, and it could potentially lead to negative returns, or being scammed. Add social media in to the mix and you could be handing scammers your personal information by participating in a simple trend or challenge.

But one in four young people in F&C's research said they now realise they should have been more cautious. One in five have realised that a short-term approach is less effective than long-term investing. But even so, the role of social media has only been cemented. More than half of Gen Z investors are actively following users offering investment advice on TikTok, Instagram and Twitter – and that’s without even mentioning the popular forum Reddit.

Understanding the risk

Morningstar behavioural economist Sarah Newcomb said speculation is fun, and that is what attracts a lot of people to investing. “And if you speculate with only money you can afford to lose, events like these can be exciting and sometimes profitable.

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"But if you are new to investing, don't understand the difference between fundamental value and market price, or you are considering putting money on the line that you need for your present or future security: stop, breathe, and walk away. No crowd of anonymous Redditors deserves your life savings, period.”

And she is right; I am personally grateful for the inception of meme stocks and accessible financial advice – it has given birth to a new generation of investors and I can think of worse skills to pick up in a pandemic. But if some guru on TikTok is guaranteeing triple returns on an asset, or telling you to choose their portfolio over an index fund, you should probably rethink your options.

Not sure whether to invest? We've devised a checklist to help you avoid getting burnt. And if you say yes to any of these, take Newcomb’s advice: stop, breathe, and walk away:

When NOT to invest:

  • Is someone pressuring you to buy right now?
  • Is your understanding of the stock unclear?
  • Has it already skyrocketed in price?
  • Does it feel like a trip to Vegas?
  • Will you struggle financially if you lose your investment?

 

is data journalist for Morningstar.co.uk

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