Social Media investors: High risks investing for thrills?

An investigation by the British FCA (Financial Conduct Authority) shows that social media tempts young investors to take high risks without understanding the consequences. In 2020 a 20-year-old DIY investor in the US took his own life after receiving a notification that his account with investment platform Robinhood had a negative balance of $178,000 that he needed to settle. Did he understand what the risks were when he started investing? Was he investing or speculating?

Research shows that many young investors invest for non-conventional reasons such as: novelty, thrill of investing, social status and competition. More conventional reasons to invest such as: improving the return on savings or saving for retirement are rarely mentioned.

What is the cause?

The availability of new ‘easy’ investment Apps such as Robinhood, EToro and Trading212, to name just a few random big apps, lowers the threshold for young people to enter the market. Many of these investors have never invested in normal investments, like stocks or bonds, before and now they invest in Crypto currencies, Contracts for Difference, Options and other complicated high risk instruments.

What are the consequences?

Almost 60% of the investors questioned state that a large loss would have a fundamental impact on their current and future lifestyle. Research shows that investors have a false sense of confidence and claim to understand the risks when clearly they don’t. Almost four in five investors agrees to statements such as ‘trusting their instincts’ and that ‘certain investment sectors and companies are a safe bet”. Social media is full with #investing content which is very popular with followers. Seeing successful investors on social media in combination with “low risks” investment offers is very tempting. As a result many investors solely rely on social media for investment news, ideas and tips and have a distorted understanding of risks.

What should I do?

Be realistic: nobody invented a sustainable get-rich-quick solution yet and never will. Here are some tips to avoid potential life changing losses:

• If you have money to invest only invest it if you can sustain the potential losses.
• Understand the risks and what potential losses your investment can cause. With certain investments you can lose MORE than your initial investment.
• If you don’t understand the instrument you invest into don’t invest before you learn about it.
• Diversify, diversify and diversify more. Don’t invest all your assets into one sector or asset class.
• Try to avoid the rush of the latest ‘hot’ investment to avoid buying at the top of the market.
• Treat high risk speculative investments as such. Would you take all your savings to the casino?
• Don’t solely rely on social media for investment advice. Many so-called gurus have an agenda.

Shoreline does not recommend to invest in speculative investments, or to invest for the short-term as the risk of losing money is too high. If you agree and would like to talk to a specialist about your long term investment targets please contact us. We are happy to help.