Social media platforms have impacted our lives in countless ways. They influence the clothes we wear, the food we eat, the places we go — and now, the investments we make.
Retail investors, particularly younger ones, frequently turn to friends and strangers on social media for investing advice. Though social media and online forums can certainly have a positive impact on our investing habits — at a minimum, they expose us to new ideas and teach us about new tools — investors need to be cautious about the information (or misinformation) they incorporate into their own strategies in this new, digital age of financial advice.
It's not a stretch to say that social media is leading today's young investors to strategies that their parents never dreamed of before.
Younger investors are trying to time the market and trading more frequently than they did a year ago, possibly because they see constantly changing advice on investment forums and from various "influencer.
A recent study found that 21% of Gen Z and 19% of millennials time the market as an investment strategy, while only 12% of Gen X and 6% of baby boomers do the same.
Of course, timing the market can be a flawed strategy. Research from Seeking Alpha conducted in 2019 found that investors who timed the market needed to be "perfectly exact" to outperform a long-term investment by more than 2%.
Market timing, while tempting, involves getting two nearly impossible decisions right: when to sell and when to get back in. Investor sentiment can pivot in an instant. If someone happens to miss selling after the latest rally, they may seriously pay for it.
As a millennial working in personal finance, I've observed the influx of information and misinformation on social media. It's led me to think about ways to account for new, unreliable sources of influence.
I've found three approaches that help investors ensure their mindsets are clear and unshakable in the face of market changes.
1. Diversification is a way to build long-term wealth
First, diversification is a way to build long-term wealth. Day trading is just a portion of a complete and diversified portfolio.
This type of short-term investing isn't a hobby. It's a full-time job that can have a life-changing impact on your future financial wellness. The average investor won't necessarily find financial success from day trading alone — it can help if it's part of a broader strategy.
Think of day trading like candy. For some investors it's okay to have it in moderation, but it's a small part of a balanced diet.
In addition to day trading, investors can incorporate long-term strategies such as growth investing, diversification, buying and holding, and dividend investing. These methods are designed to appreciate over the years and can be well-suited for younger investors with the luxury of longer time horizons.
2. Vet trends and financial information
If an investment seems too good to be true, it usually is. Investors of all ages must be skeptical about what they're reading, particularly on social media where sources can be unknown or disguised.
Investing forums, like those found on Reddit, contain a wealth of knowledge. But make sure to carefully scrutinize and verify posted advice or information. Don't blindly follow.
Consider the source of the information when vetting financial advice. What are the poster's qualifications? Is the information contrary to something you read from a more trustworthy outlet? Every investor must ask these questions before putting money behind something new.
3. Sometimes, it's best to log off and ignore the noise
Investing is exhilarating and engaging. It can also be stressful if your mood swings along with market highs and lows.
Putting your money behind stable stocks or exchange-traded funds and letting it slowly grow over time can be a more stable approach.
You won't be a part of the quick wins that the people you follow on social media may experience, but you also will be less likely to experience financial whiplash via extreme losses.
If there's one thing I would bet on, it's that you'll be happier in the long run.
— By Brian Barnes, founder and CEO of M1
