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Navigating the investment waters: Why social media isn't your best advisor?
In an era dominated by social media, it's tempting to turn to platforms like Twitter, Reddit, or TikTok for investment advice. However, this can be a risky move, as the cacophony of voices can easily lead investors astray.
QUOTE
“In investing, knowledge is your compass, and thorough research is your map; armed with both, you can navigate the markets with confidence and make decisions that stand the test of time.”
In this article, we'll explore the reasons why social media may not be the best source for investment advice. Here are 6 things to look out for and keep in mind when browsing through the endless financial content available online:
Beware of hype and FOMO (Fear of Missing Out)
Social media platforms are notorious for creating hype around certain stocks or cryptocurrencies. FOMO can drive investors to make impulsive decisions, often resulting in losses.
With the fear of missing out (FOMO) kicking in, and the allure of quick profits, your judgement could get clouded, and all of a sudden, you’re blindly following the crowd on social media. It’s crucial always to apply independent judgment and conduct throughout research, commonly worded as due diligence online, before making ANY investment and trading decisions based on trends or popular sentiment seen online.
With the fear of missing out (FOMO) kicking in, and the allure of quick profits, your judgement could get clouded, and all of a sudden, you’re blindly following the crowd on social media. It’s crucial always to apply independent judgment and conduct throughout research, commonly worded as due diligence online, before making ANY investment and trading decisions based on trends or popular sentiment seen online.
Rule #1
Don't succumb to FOMO. Conduct thorough research before making investment decisions.
Separate noise from expertise
Not all voices on social media have the same level of expertise. Tweets or posts may be driven by personal biases or misinformation.
One potential source of information is the so-called finfluencers - social media influencers who give financial and investing advice to their followers through mediums such as TikTok and YouTube.
They gain traction partly because social media is increasingly used as a search engine. Usually finfluencers with financial accreditations gain a more positive response than those without. However, many finfluencers do not obtain the qualifications that are required of financial service professionals.
One potential source of information is the so-called finfluencers - social media influencers who give financial and investing advice to their followers through mediums such as TikTok and YouTube.
They gain traction partly because social media is increasingly used as a search engine. Usually finfluencers with financial accreditations gain a more positive response than those without. However, many finfluencers do not obtain the qualifications that are required of financial service professionals.
Rule #2
Verify the credibility of sources. Rely on expert opinions and verified financial information.
Pump-and-dump schemes
Social media can be a breeding ground for pump-and-dump schemes, where individuals or groups artificially inflate the price of a security before selling off their positions.
The infamous case of GameStop in 2021, driven by Reddit's WallStreetBets, serves as a stark reminder of how susceptible retail investors can be to external influences.
The infamous case of GameStop in 2021, driven by Reddit's WallStreetBets, serves as a stark reminder of how susceptible retail investors can be to external influences.
Rule #3
Be cautious of sudden surges in popularity. Investigate the reasons behind price movements before joining the hype.
Long-term vs. short-term perspectives
Long-term investors often follow a buy-and-hold strategy, capitalising on the power of compounding and the overall growth of the economy. Social media may encourage short-term trading strategies, such as day trading or reacting quickly to market trends.
Beware when researching through social media since it may not align with your long-term financial goals.
Beware when researching through social media since it may not align with your long-term financial goals.
Rule #4
Establish a clear investment strategy aligned with your financial objectives. Avoid knee-jerk reactions to social media trends.
Distinguish between information and advice
Information shared on social media may not necessarily be financial advice tailored to your specific situation.
Regulatory bodies across the globe are increasingly monitoring social media platforms for potential market manipulation, emphasising the importance of distinguishing between casual information and professional advice.
Regulatory bodies across the globe are increasingly monitoring social media platforms for potential market manipulation, emphasising the importance of distinguishing between casual information and professional advice.
Rule #5
Don't substitute genuine advice with social media chatter.
The Echo Chamber effect
Social media tends to create echo chambers where investors are exposed to similar viewpoints, limiting their perspective. This can lead to groupthink and a lack of critical analysis, as highlighted by a study in the Journal of Behavioral Finance.
A different study noted that the knowledge discovery process may be impacted by the order in which information is prioritised and presented to the viewer. For example, social media content that becomes slightly popular may be further promoted due to the observed popularity, even if the content of the information is lower in quality.
A different study noted that the knowledge discovery process may be impacted by the order in which information is prioritised and presented to the viewer. For example, social media content that becomes slightly popular may be further promoted due to the observed popularity, even if the content of the information is lower in quality.
Rule #6
Verify the credibility of sources. Rely on expert opinions and verified financial information.
Recap
While social media can be a valuable tool for staying informed, it should not be the sole basis for your investment decisions. By adhering to these rules, you can navigate the digital landscape more effectively, protecting your investments from the pitfalls associated with social media-driven advice.
Remember, a well-researched and disciplined approach is key to long-term financial success.
Remember, a well-researched and disciplined approach is key to long-term financial success.
