Last week, Reddit users caused a stir in the market when they bid up the prices of so-called "meme" stocks, including GameStop and AMC Entertainment — names that financial institutions such as hedge funds were betting against. The eye-popping rise in those stocks' prices rippled across the internet, with users on Twitter, TikTok, and other social platforms urging their followers to get in on the action and ride those stocks "to the moon."
Even before the recent market moves, social media users were getting plenty of online advice. And while some of the would-be advisors are real-life financial professionals preaching sensible, goal-oriented strategies, many more, it seems, are amateurs urging viewers to follow in their footsteps to achieve quick financial gains.
If you're an investor looking to build wealth over the long term and avoid dramatic mistakes, knowing what kind of advice you can trust is crucial.
You needn't scroll far down the feed of tongue-in-cheek Twitter account @TikTokInvestors to see what kind of advice you can find on "FinTok," with influencers recommending individual stocks, flogging cryptocurrency, and encouraging day-trading strategies.
That this kind of advice has become common isn't surprising given how well the stock market has done — especially during the pandemic, when many folks entered the stock market for the first time during a raging bull run, says Brad Klontz, a certified financial planner and financial psychology professor at Creighton University. "This is fairly typical of what you see in extended bull markets, and now you have people out there who truly believe that stocks only go up," he says. "In a bull, everyone is a swashbuckling risk-taker. In a bear market, everyone is a skittish, scared little deer."
That said, Klontz hasn't seen this many swashbucklers in a long time. "What I've seen on TikTok is a lot of trading, penny stocks, and pumping and dumping," he says. "I was kind of appalled. I thought day-trading died back in the '90s."
Pump-and-dump schemes involve someone recommending a low-priced stock based on dubious information in order to get other investors on board, thereby inflating the price. Once the stock pops, the schemer unloads their shares at a profit.
That doesn't mean that everyone recommending stocks on social media is out to defraud you. But you should be extremely skeptical of any social media user recommending strategies that see them trading in and out of stocks or other investments. This is true even if someone is touting their own short-term profits, either by showing impressive financial statements or flaunting material wealth that's apparently the result of their stock market success.
For one thing, decades of academic research has shown that the vast majority of people fail to make money from such strategies, which rely on timing the movements of certain investments. For another, you have no way of verifying whether the "results" you're seeing are real, says Charles Rotblut, vice president of the American Association of Individual Investors.
"You have no idea how successful someone has been with their trades," he says. "It's very easy for them to doctor a brokerage statement and say, 'I made this, I made that.' For all you know, they could be trying to recoup losses by trying to be someone they're not."
Using investment advice you find on social media as a jumping-off point can be one way to go. "It's important when considering any investment to do your own research," says Rotblut. "If someone is talking about how great a stock is, for instance, go and look at the financials."
If you're considering a stock, he says, look at trends in the company's earnings and revenues, and see what analysts are estimating for the future — data you can find through many online brokerage accounts or through third-party sites such as CNBC or Morningstar.
Video by Courtney Stith
Dig through a company's investor relations page too, he says. Its annual reports will give you an overview of what is going on with the business, and will detail any risks to the business that you ought to know about. Firms often post investor presentations on their sites as well, which give investors insight into where the company thinks their business is headed in the future.
Once you've formed a thesis about an investment, it may be time to consult professional research from analysts at research firms, such as Morningstar, Argus, and CFRA, or from investment banks, such as Bank of America and Credit Suisse — some or all of which may be available through your brokerage account, and many of which will be quoted in mainstream financial publications. "These are obvious places to get feedback, where you can get someone else's viewpoint," says Rotblut. "I'm not saying reports should drive your decisions, but if you encounter a different viewpoint from your own, it may be a reason to ask yourself why there's a difference."
Another potential pitfall of following online advice: In many cases, you don't know what level of financial expertise the advice-giver has, nor any details about their financial circumstances. Even if you hope to follow in the footsteps of a successful amateur, a strategy that worked for them may not apply to your specific financial situation.
Before considering any investing advice, it's important to remember that buying and selling investments is just one component of your larger financial picture, says Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York City. "You probably shouldn't take investing advice online in general, because no one is going to be able to give you something that works for you," he says. "You should listen to people who take a comprehensive look at things."
Video by Helen Zhao
That can mean working with a financial advisor, who can help you tailor an investing strategy to fit within the rest of your financial life. For most people, the best option is a certified financial planner who follows a fee-only payment model. "It's become the standard for financial planning over the past 50 years," says Joe Maugeri, managing director of corporate relations at the CFP Board. "CFPs are qualified to deliver financial planning in every aspect of your life, from tax strategies, to estate planning, to retirement planning."
Hiring a financial pro who is fee-based and who acts as a fiduciary (as all CFPs must) ensures that you won't encounter conflicts of interest from your planner, as you might if you hired one who receives compensation for selling you certain financial products.
Financial professionals come in different flavors, so it pays to shop around. The complexity of your financial situation and your need for one-time or ongoing advice may affect your choice of pricing model – models include one-time fees, subscription pricing, and setups in which you pay a fee representing a certain percentage of your assets.
Make sure you pick someone you like working with, says Boneparth. "Of course you want someone with experience," he says. "But relatability is key, too. You ideally want a mix of all three."
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