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First, a housekeeping item. What follows is NOT an indictment of investing in social media equities or funds. Depending upon the timeframe, that’s been a rewarding endeavor. For example, the Global X Social Media ETF (SOCL) is up nearly 75% over the past two years.
Rather, the topic du jour is how social media itself can be a force for good and bad among retail investors. For advisors with a significant percentage of client bases comprised of baby boomers, don’t be dismissive of what follows. If you want to better connect with millennials and Gen Z, it pays to understand their social media proclivities.
For retail investors reading this, what follows isn’t a criticism of your behavior. Rather, it could illuminate you to some areas meriting caution and correction. After all, there are some credible sources of investing advice on social media platforms. There are also a bunch that leave a lot to be desired and expose followers to bad advice and big losses.
Being Judicious at the Intersection of Social Media, Investing
Painting with broad strokes here, TikTok is a lot things, but a prime destination for reliable financial advice isn’t one of those things. When it comes to personal finance and investing ideas, TikTok can be a playground for dubious tips and breeding of bad habits.
For all the entertainment and shopping advice they can provide, most influencers aren’t experts in any realm of finance and a vast majority certainly aren’t certified advisors. Yet 72% of Gen Zers and 57% of their millennial counterparts admit they rely on TikTok for financial advice.
“So if that describes you, consider this. Just because the information is there doesn't mean you should automatically trust it,” notes Cindy Scott of Charles Schwab. “My friends and relatives often ask my opinion of financial videos they've found on social media. Some of them? I simply say: Delete! Other videos may have both good and bad points. But ultimately, when it comes to social media, digging deeper might be a better idea. Don't take anything at face value.”
Whether it’s cryptocurrency, real estate or stocks, financial influencers on social media are often tempting followers with the idea of getting rich quick – something that’s difficult to do and involves considerable risk. It’s not the platforms’ faults, but Instagram and TikTok are vulnerable to such schemes because they image-based (pictures and videos) platforms. It might sound trite, but remember that anyone can rent a beach house and a Ferrari for a day and purport to have accumulated vast wealth day trading penny stocks and meme coins.
Old School Advice Matters
When it comes to reducing vulnerabilities to bad financial advice on social media, some old school wisdom is worth remembering. First, there’s nothing wrong with being a bit skeptical. Skepticism and negativity aren’t the same thing and if something sounds too good to be true, it very likely is.
Second, remember the old saying about what everyone else does and jumping off of bridges. Sure, we all got tired of hearing that from our parents when we were younger, but it actually has practical applications in investing. Said differently, simply because a lot of people are doing something that doesn’t make it right or profitable.
“Herd mentality can be dangerous, especially when it comes to your money. People tend to be driven by two primary emotions: greed and fear,” adds Scott. “And each can lead to bad money mistakes. For instance, greed could make you want to jump into crypto or real estate because it sounds like everyone is making a killing. While fear might make you want to cash in your investments at the wrong time. So don't follow the herd. Instead, listen to qualified experts and people you trust.”