Social media ‘investment experts’ are everywhere, on FinTwit, as Instagram influencers and TikTok investors. Making investments and investing more accessible is a worthwhile goal, but the wisdom of the crowds on social media can have its downside.
Social media can influence people that know very little about a relatively complicated topic – investing as an example – to believe they have the answers and chase the next best thing. In between entertainment, gossip, memes and news, desktop research becomes gospel and provides relief to anxiety and opportunities for a brighter future.
According to Chase Bank, social media platforms have created a digitised investment environment that provides investors with a more efficient way to access a variety of online information. Despite the benefits, it warns that social media makes it easy for influencers with limited investment knowledge to share their trading and personal finance opinions.
Social media can turn the ‘man on the street’ into an expert on any subject, also when it comes to investing. The bigger the entertainment value, the larger the following, the more successful the investment advice seemingly is.
It also creates an urgency or ‘FOMO’ when everyone seems to make money with the next best thing, whatever that is – cryptocurrencies today or tech shares tomorrow. As the joke goes, the “diversified” portfolio of a social media investor today is 60% in crypto and 40% in Tesla shares.
The Momentum Investments Sci-Fi report¹, which provides a bird’s eye view of investor behavioural patterns on the Momentum Wealth platform in 2021, shows clearly that investors have become more engaged with their investments. In doing so they incurred an annualised behaviour tax of 3.5% for 2021 (read the report here).
Instant access to portfolio values and the latest news of the latest crypto or meme stocks are what millennials and Gen Z are after and they appear to be taking the advice from peers more seriously than that of financial advisers, writes Paul Nixon, head of behavioural finance for Momentum Investments, in the report.
He says more control, from a behaviour tax perspective, is certainly less than ideal. There are likely two primary behavioural biases at play. The first is overconfidence. ‘Expert’ opinions are seemingly easy to come by and any view is easily supported by a number of sources online. When coupled with selectively attributing positive outcomes to skillful decision-making and attributing poor outcomes simply to bad luck, it creates the illusion that investing decisions are much easier than they actually are. The second bias is loss aversion. People have a fear of losing money and we get a greater sense of control if we are more engaged with our investments, says Nixon.
And the world is fraught with scamsters who understand something about the human psyche and the emotions of fear and greed that accompany money decisions and perceptions. Investing is about people’s dreams and goals. Add a splash of humour, easy to digest content and people follow the ‘advice’ blindly. There are a multitude of such “advisers” on different platforms showing how easy it is to make money or the lifestyle rewards that comes with too good to be true astronomical returns.
There are a multitude of such “advisers” on different platforms showing how easy it is to make money or the lifestyle rewards that comes with too good to be true astronomical returns.
But it is worthwhile reminding ourselves, and clients, that if something is too good to be true, it usually is. Unfortunately, good investment advice is often boring compared to the ‘sexy’ social media ‘advice’.
We believe in the value of financial advice from a registered and credible financial adviser, not social media ‘experts’. We encourage clients to stay invested and stick with their long-term plans. With a long-term financial plan in place often the best course of action is to do nothing. Only change the plan when personal circumstances change. Sound advice but compared to the glitz and glamour of social media, hardly worth sharing on these platforms.
Financial advisers can help their clients avoid unnecessary risks by avoiding emotional decisions and helping them focus on, and ultimately achieve, their personal, long-term financial goals.
The challenge is in getting clients to stick to their personal goals, something that we remain committed to achieving through our outcome-based investing philosophy. Investing is personal, and by connecting to the outcome you want the client to achieve, the focus is on the end goal, instead of being swayed by the next best thing or disheartened by short-term underperformance that triggers switching from one investment to the next.
Perhaps also advise them to use social media for what the name implies, being social and sharing photos with friends and family.
And follow Momentum Investments on LinkedIn here for valuable content on investing, markets, and economics.
[1] Sci-Fi Report 2021. Momentum Investments.
Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider. Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).
