Investing in the Age of Misinformation

When it comes to investing, information plays a crucial role behind decisions, and social media platforms have increasingly become a popular resource.

According to a 2022 FINRA study: 60% of younger investors use social media for investment information, compared to 35% of those ages 35-54.

This growing reliance on social media for young investors is a worrisome trend given the amount of misinformation (shared false information without malicious motive), disinformation (false or erroneous information deliberately spread to damage someone or an organization), and fake news (usually with the intent for financial or political gain) being disseminated online.

Misleading information is an emerging cyber threat that could cause billions in losses in a matter of seconds. For instance, in 2023, after a fake image of the US Pentagon complex being on fire was shared by multiple “verified” social media accounts, the Dow Jones Industrial Average dropped 80 points due to the fake news before recovering later.

It also poses a risk to everyday investors who look to social media for financial advice. As more retail investors make up larger portions of the total shares traded in the stock market, it’s crucial to be aware of where information comes from and determine what is true or false. Ahead, we’ll go over a few tips to help you navigate the world of investing in the age of misinformation. 

1. Check your sources

It’s important to know who you are taking advice from before acting on it. In recent years, there has been a rise of social media influencers sharing questionable financial advice online. These so-called “finfluencers” often tout their investment strategies and stock picks, promising attractive returns.

However, they do not always disclose whether they may be compensated to promote certain products or claims and may have a conflict of interest with the advice they are giving online. Their main objective is to create highly stylized, emotional, and entertaining posts or videos to attract followers and engagement.

This doesn’t mean there’s no value in their advice, but here are some caveats to bear in mind:

• If it’s too good to be true, it usually is. Be especially careful of anyone promising “guaranteed” returns and “risk-free investments.”
• Dubious claims. If the person is giving reckless advice such as “how to avoid paying your mortgage” or “how to hack your credit score,” be wary. Avoiding your financial obligations can lead to serious consequences.
• Check their credentials. Are they really the experts they claim to be? Keep in mind that most professional financial advisors (e.g., investment advisors) and brokers should be registered with their local securities authority. However, even if they are credentialed, their advice online is tailored for a mass audience, not individuals.
• Social media verification badges do not indicate credibility. Certain social media platforms sell verification badges to any paying account holder. This usually helps boost their content to gain more views. There have been instances where verified accounts spread false information that impacted the stock market.

2. Be wary of herd mentality

Social media platforms are often driven by users who seek fast gains or trends rather than long-term strategies. The algorithms tend to reward content that is popular and easy to consume. This increases risk of information being driven by “herd mentality” where popular stock picks or strategies dominate a social media feed and could drive “herds” to invest without research or rational justification. (Investors may be tempted to follow the trend for fear of missing out.)

While herd mentality may sometimes help increase value in certain stocks in the short run, it could lead to market bubbles and increased volatility.

There may also be a higher risk of falling for a “pump and dump” scheme where individuals purposely use social media to promote specific stocks or investment opportunities to “pump” their prices, and then “dump” the positions at a higher price, potentially leaving followers with substantial losses. 

3. Confirmation bias

As more investors turn to social media for tips and information, there is a risk of confirmation bias – where investors only see content that aligns with their perspectives and beliefs, leaving them unaware of potential risks and other points of view.

Every investor has a unique profile that includes their goals for investing and risk appetite – there is no one investment strategy that can fit all needs. While social media may make learning about investing exciting, investors should be wary of the underlying motives behind content and do their research thoroughly.