The influence of social media is undeniably far-reaching, and the world of investing is no exception. Robinhood, Reddit, and other platforms are creating new avenues for companies to target and reach broader audiences—and giving would-be traders the ability to tap into useful information. The result is a social media–fueled investing frenzy that shows no signs of fading.
In many ways, it’s good news. Retail traders accounted for nearly 20 percent of the daily market volume in 2020, up from just 10 percent in 2019 according to Citadel Securities, with younger investors representing a big chunk of that. And when capital market participation expands beyond the echelons of a privileged few, it signals greater democratization of investing, telling us the masses are actively participating in economic growth. Here’s the caveat: People having greater access to tools to invest is indeed positive—if they’re equipped with the knowledge to do so.
April is National Financial Literacy Month, shining the spotlight on the importance of education in helping people make informed investment and planning decisions to ensure their long-term financial wellness. With this in mind, we’ll explore some of the nuances of social media–fueled investing and the opportunity this trend presents for financial advisors to help improve financial literacy in this area, especially among the younger generation.
The Rise of Meme Investing
Interestingly, the COVID-19 pandemic has created some welcoming conditions for herds of new retail investors. Lockdowns and restrictions have meant less discretionary spending—which translates to more cash available to invest. For some, even stimulus checks have created cashflow to trade with. With commission-free trading platforms, there are fewer hurdles to trading, and with more time to kill, people have discovered hot investing ideas on social media platforms such as Reddit and Twitter. This has given birth to a style of investing that hasn’t yet made its way into traditional investing textbooks—"meme investing”—in other words, investing ideas that go viral based on social media hype rather than fundamentals. When you factor in the free offers and authorizations for riskier transactions that are available—for some, it’s the equivalent of bringing a casino into their homes.
The Allure of New Generation Platforms
How do commission-free trading and social media fit into all of this? Together, they hold the power to unleash a tidal wave with the potential to drown naïve investors who can’t distinguish gambling from investing.
Tools and apps like Robinhood make equity markets accessible. Once the flood gates are opened, compressed trading fees and the promise of high returns offer a powerful incentive to participate—and higher trading volumes can lead to better price discovery and even make the markets more efficient. Social media platforms are a strong lure for younger investors in particular, who often rely on them as primary sources of information—a virtual hub for swapping stock and trading tips and ideas. The potency of rapid mass coordination and universal access is undeniable.
So, what’s wrong with this picture? For starters, the delusion of easy and massive gains coupled with fear of missing out, or FOMO, can be compelling for unsophisticated investors—sometimes so much so that they may ignore some investing basics like a company’s performance or its prospects for growth and find themselves in over their heads. Of course, some can and will profit on the irrational speculation, but many others may be left holding the bag.
A Cue for Advisors
These trends and their implications underscore the importance of financial literacy—and the critical role advisors can play to educate clients and their children on responsible investing and long-term financial planning.
While social media can be a great place to get familiar with the market, new investors—millennials in particular—could benefit from education they’re not getting on those platforms. According to a recent report by the Global Financial Literacy Excellence Center at the George Washington University and TIAA Institute, millennials represent the largest, most highly educated, and most diverse generation in U.S. history—yet this growing cohort of investors is also struggling with financial literacy, with only 16 percent qualifying as financially literate. Even with their technology and social media savvy, this makes them vulnerable to impulsive investment decisions. While educating clients at all stages is important, of course, focusing on improving financial literacy in younger clients will help prepare them for a lifetime of responsible investing and financial well-being. Here are some themes you can focus on as conversation starters:
Stick to the plan. Financial influencers on real-time discussion platforms drive social sentiment and may lead investors to make emotional, rash choices. Explain how these short-term sentiments may disrupt long-term financial goals and highlight the benefits of diversification and asset allocation.
Understand the window of opportunity. Information on social platforms have a short shelf life. Explain the risks for novice investors who may be acting late and unwittingly as part of an exit plan for more sophisticated traders.
Be cautious of distortions. Social media influencers often exclude failures and amplify successes, making them seem more probable. Be sure clients are aware of asymmetric information as well as the potential for market manipulation and pump-and-dump schemes on online platforms.
Beware of shiny objects. In the heat of a social media–fueled investing fad, the new hot stock isn’t always what it seems. That’s why it’s important to do research beyond the information found on social platforms—or invest with someone who does. Quite often, these are companies that have had no material changes in their business prospects, but suddenly everyone wants in.
Financial Literacy Is a Must-Have
It seems likely that the social media–fueled investing trend is here to stay, and with it comes the possibility of overall greater participation in capital markets as well as a new generation of investors. But education and guidance are no longer “nice-to-haves”—they’re a necessity for protecting investors from being lured into the frenzy of meme investing and keeping them on a path toward long-term financial well-being. Only by improving financial literacy can we realize the broad-reaching benefits of democratizing access to information and investing. And the time to answer that charge is now.
This material is for educational purposes only and is not intended to provide specific advice.