Stock Gains Can Add Up After Big Declines
Sudden market downturns can be unsettling. But historically, US equity returns following sharp downturns have, on average, been positive.
Scroll through your social media feed after a major move in the market, and you will see a flood of hot takes, bold predictions and “can’t-miss” tips. Welcome to the age of the finfluencer, a social media influencer who broadcasts their takes on investing, budgeting and other financial topics to large online audiences.
Here is the thing. A finfluencer might be a highly credible financial professional, or they might be an enthusiastic amateur. They could be a sports star who dabbles in cryptocurrency or a trendsetter who has big thoughts on budgeting.
But regardless of who is dishing out advice, people are listening. In fact, more than 40% of people have considered acting on advice from finfluencers, and that number is higher among younger investors.
And while some advice may be sound, much of it is self-serving or flat-out wrong. Separating good advice from bad is not always easy. While regulators in India and the UK are cracking down on finfluencers, the U.S. remains largely hands-off, leaving consumers to fend for themselves. The good news? You have the power to protect yourself, and your loved ones, from risky financial advice. Let’s take a closer look.
When it comes to financial advice from big names in social media, there are several concerns:
Accuracy. Posts on social media spread because they are engaging, not because they are accurate. Plus, it is not always obvious which finfluencers are academics or professionals with expertise who may be pushing sound advice, and which ones are not. One thing you can do is investigate their backgrounds. For instance, look up brokers and financial advisors using FINRA’s Broker Check to find out if they are registered to offer investment advice and whether they have received any complaints or had regulatory action taken against them.
Relevance. Even if a piece of financial advice on social media comes from someone knowledgeable, it still may not be useful to you. Your financial plan is tailored to suit your unique circumstances and goals. Finfluencers are not considering your personal financial picture and life goals. So even tips that are basically accurate may not be relevant to you at all.
Bias. Finfluencers, like all social media influencers, are obligated to disclose when they are being paid to promote. Back in 2022, the SEC fined Kim Kardashian $1.26 million for failing to disclose that she was paid $250,000 to promote a cryptocurrency on Instagram. But even if they are not getting paid, they might be pushing an agenda or simply trying to bump up their page views. If they lead you astray, they may not face any consequences at all.
Increased risk. Investors who rely on social media for advice may be more likely to invest in riskier assets. Social media investing played a significant role in driving up the price of meme stocks beginning back in 2021. The Federal Reserve warned that social media may increase risk for individual investors and the entire financial system due to speculation and a bias toward riskier stocks.
Speaking of biases, social media platforms are basically designed to become echo chambers. Algorithms learn what kind of content you like and feed you more and more of it. If your feed is tailored to your tastes and opinions, the posts you are seeing may land you in the behavioral trap known as confirmation bias. Confirmation bias describes the very human tendency to favor messages that reinforce our preexisting beliefs. If the financial advice we are seeing confirms what we already think, we are more likely to accept it, and perhaps act upon it, whether it is valid or not.
Learning to recognize this bias can help you counter it, which involves questioning your beliefs and seeking alternatives that may challenge your point of view.
In the end, just because a social media account is popular does not mean the information it presents is trustworthy. It is completely fine to consume media because it is entertaining, but avoid allowing the advice you see to drive your financial decisions.
Not sure who to trust? We can help you sort signal from noise, and determine whether the information you are seeing is accurate and if it has bearing on your financial plan.
This post was written and first distributed by The Writing Company.
DISCLAIMER
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
Sudden market downturns can be unsettling. But historically, US equity returns following sharp downturns have, on average, been positive.
During ups and downs in the markets, it is helpful to zoom out and view market returns over the longer term.