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What social media challenges teach us about investing

Posted: 18 September 2020 9:29 am News

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Finance expert Ted Richards shares key lessons new investors can learn from social media challenges.

Social media can do some great things – take the ice bucket challenge as an example, raising money and awareness for motor neurone disease. But as we've seen over the years, social media can also lead people to doing harmful and dangerous things.

One example I can think of is the Tide Pod challenge. Tide Pods are brightly coloured (and poisonous) packets of laundry detergent that are placed inside dishwashers. Their bright colours and size mean that they tend to resemble confectionery.

The Tide Pod challenge made news headlines in 2017 when people began filming themselves eating the poisonous cleaning product and posting it on social media. This behaviour became such a concern that in 2018 YouTube and Facebook took down videos of people eating Tide Pods to stop them influencing other people to do it.

So, what's this got to do with investing?

While the Tide Pod challenge has come and gone, social media is now influencing another form of dangerous behaviour: speculative day trading. Unlike a Tide Pod, it won't put your health at risk, but it can do some serious damage to your bank account – and herd mentality is to blame.

Speculative day trading involves inexperienced investors flooding the stock market and punting on companies they know very little about. Often winners take to social media to declare their successes. Jealousy and FOMO start to emerge in those who missed out and, before you know it, there's a rush of amateur investors seeking out trading tips for the next big thing.

The tipping point for social-media-fuelled day trading activity could have been when young, wealthy investor Dave Portnoy started using Scrabble pieces to determine the next stock he'd buy. He declared to his hundreds of thousands of followers how easy day trading is.

The Australian Securities & Investments Commission (ASIC) has also detected a rise in social media threads and groups aimed at amateur investors. These spaces are unmoderated and provide insufficient information on the risks involved with speculative day trading.

Despite the pervading "get rich quick" mentality, speculative day trading comes with huge risk. According to ASIC, 80% of the 255 stocks that have doubled in the last 12 months had negative earnings in the previous financial year. Furthermore, the average holding period for trades is down to just one-and-a-half days. And those who can't afford to buy a single share of a company can now buy fractional shares.

Steering clear of risky strategies

There are several ways to invest with less risk, for example diversifying your portfolio, keeping your fees low and getting professional help if you're inexperienced. You can also focus on time in the market rather than trying to time the market. These rules have worked year after year, decade after decade.

But I won't remind you of these fundamental investing rules for two reasons:
Firstly, warning people against partaking in certain mainstream fads often has the opposite effect. We saw this play out in Tide's brand response to the Tide Pod challenge.

Secondly, I don't need to tell you what not to do. Just like people know Tide Pods are harmful, you already know it's unwise to speculate on the share market. Amateur or not, investors don't need to be reminded that hundreds of unprofitable companies doubling in value is a risky option. You're reading this article on Finder so I think it's fair to assume you know the importance of doing research with important financial decisions and comparing your options.

Just remember, not all good decisions have good immediate outcomes. Not all bad decisions have poor immediate outcomes. But over time, poor decisions get found out and good decisions usually hold up.

Ted Richards is director of business development at online investment service Six Park and host of investment podcast The Richards Report.

Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.

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