Are you getting your monetary recommendation from TikTok and Reddit? That might backfire
Jakub Porzycki | NurPhoto | Getty Images
It can be difficult to look away from the constant stream of financial success stories and tips on TikTok, YouTube, Reddit, and other social media platforms.
WallStreetBets and other forums users brag about tens of thousands of dollars made in a short period of time by buying the "meme stocks" that hedge funds wagered against. It's clearly a compelling story: Hollywood is already planning a film about the rogue investors who skyrocketed GameStop's stock price.
However, such intrigue and drama can be a red flag when deciding how to spend your hard-earned cash.
"Good investment advice is boring," said Barbara Roper, director of investor protection for the Consumer Federation of America. (She ticked some of the tried and true truisms: Invest for the Long Term. Diversify. Use Low-Cost Mutual Funds.)
Of course, many of the Personal Finance TikTok videos, which have been viewed by more than 3.5 billion people, come with helpful budgeting tips and how to reduce credit card debt. Often, however, it is content that promises more immediate wealth and gets more clicks.
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As a result, the platform is overflowing with developers making market forecasts and encouraging you to buy certain stocks or cryptocurrencies so you can kill like them.
Don't expect to be able to copy their results, experts say.
"People never realize that luck makes them profit," said Andreas Park, associate professor of finance at the University of Toronto.
Park's research has found that the average day trader loses money because they tend to buy and sell too late, and not necessarily for good reason either.
On the flip side, as frustrated as some may be with hedge funds, they didn't bet GameStop stocks for free, Park said. He pointed out that the chain of video game stores is expected to decline in value as malls across the country close and people make more of their online game purchases from the comfort of their homes.
Even so, people can put a lot of confidence in the advice they get online, especially if it can be found on forums or platforms that they visit frequently and are happy to face.
"Social media gives you an illusion of intimacy where it doesn't exist," said Roper.
In reality, however, you have no way of knowing if the person on Reddit telling you to invest in GameStop is actually putting down their own stocks while they speak, Roper warned.
And while there are ways to scrutinize traditional financial advisors, it can be impossible to find out the intentions or potential conflicts of interest of someone spitting advice online.
Going against your instincts on the internet can help, said Dr. Brad Klontz, psychologist and certified financial planner. Market bubbles are driven by a herd mentality that only amplifies social media, he said.
"If you were left behind by the tribe for thousands of years, you could die," said Klontz, who is also a professor of financial psychology and behavioral finance at Creighton University's Heider College of Business. "So when we feel like the tribe is moving away and we're not there, it creates an existential panic.
"Be aware of how we are wired," he added. "It will keep you from making the classic financial mistake of buying high and selling low."