The pandemic lockdown spawned an internet subculture obsessed with investing in meme stocks. It’s now commonplace to turn to influencers on Twitter, Reddit, and TikTok to find out what to invest in next.
The stock market is confusing, after all, and turning to a stranger (or even a friend) who claims to have the answers can feel like the easiest path to making money. In reality, it can be an expensive mistake.
Last week, the New York Department of Justice announced the arrest of an investor for allegedly operating a pump and dump scheme through Twitter. According to the federal complaint, the man shared “false and misleading information” about penny stocks with his 70,000 followers so they would purchase shares.
He would then allegedly turn a profit — $1 million in total — by “secretly” selling his own shares at a higher value, leaving the other investors with significantly devalued investments.
Here’s how to protect yourself from bad investing advice on social media and where to find good advice instead.
The trouble with following investing advice online
General financial advice on social media, such as why you need an emergency fund or how to pay off high-interest debt, is often good practice regardless of your financial specifics.
The problem with taking investing advice from a stranger is that it isn’t one-size-fits-all. Not even close. A successful strategy is built on an investor’s unique financial picture, including risk tolerance, risk capacity, time horizon, and goals. For most investors, a good long-term strategy doesn’t include frequently buying and selling individual meme stocks. It’s time consuming and can be more expensive than investing in index funds or mutual funds.
Someone may use social media to brag about their gains from buying a specific stock, for example, and encourage others to replicate their strategy. At best, their finances look different than yours, so the advice they are broadcasting might not be right for you. At worst, they’re not sharing the full picture, failures and all. Or they’re trying to get rich quick at the expense of other investors.
The SEC says aggressive stock promotion on social media, in newsletters, or in advertisements can be a red flag for fraud.
“Pump and dump stock schemes cause mistrust in the market and have real victims who often invest large sums of money, only to have their hopes shattered by a fraudster’s greed,” said Ricky J. Patel, acting special agent-in-charge of the New York Field Office of Homeland Security Investigations. Never take a stock recommendation in one of these mediums at face value. Always do your own due diligence.
Social media’s favorite investment topic, cryptocurrency, is especially vulnerable to pump and dump schemes. The crypto market isn’t regulated, so ill-intentioned investors can run amok and the people who follow their advice have no recourse. Most recently, the New York Times reported that a new cryptocurrency inspired by the Netflix series “Squid Game” mysteriously crashed minutes after hitting a more than $2,800 valuation.
Whether investing advice on social media is pushed by would-be scammers or well-intentioned investors, it should always be filtered through your own values system and cross checked with credible sources. Any investment worth having in your portfolio will still be there tomorrow.
Where to go for advice instead
Social media can still be a good starting point for financial advice if you follow reputable sources. Financial planners, advisors, and other experts often share sound, albeit bite-sized, guidance on Twitter, Instagram, and TikTok.
Before acting on any advice, make sure the source is who they claim to be. Use tools like the CFP Board’s verification check for financial planners or FINRA’s BrokerCheck for investment advisors and brokerages.
Anyone who is giving reasonable and unbiased advice probably won’t hide behind a pseudonym or avatar. The man being charged by the SEC in the alleged pump and dump scheme didn’t use his real name on Twitter. He went by the name of a well-known criminal from the book and movie “A Clockwork Orange” — Alex DeLarge — and that’s probably not a coincidence.
Remember, there’s no shortage of smart and helpful books you can pick up to learn about building wealth in the stock market. Reputable news organizations are also a great place to cross check your facts.
How to hire a professional
Of course, the best investing advice comes straight from the professionals. Certified financial planners and other advisors who are fiduciaries are legally obligated to put your interests ahead of their own. Random Twitter users and TikTokers are not.
Of course, advice gleaned from social media is free, and hiring an advisor will cost you.
If you’re investing through a workplace retirement plan like a 401(k) or a taxable brokerage account, the retirement plan provider or financial institution can set you up with an advisor to craft a personalized investment strategy, or at least answer any questions you have about investing.
During your first meeting with an advisor, which should be free, they should share their rates and explain how they make money. It’s best to look for a fee-only advisor who charges an hourly rate, project rate, asset under management (AUM) fee, or some combination of those. Fee-only means the advisor earns money from client fees. They don’t earn commissions from recommending or selling certain financial products or investments, which ensures you’re getting objective guidance.
You can also use platforms like the CFP Board website, XY Planning Network, and The National Association of Personal Financial Advisors to find an independent fee-only financial advisor.
Despite popular belief, you don’t need a huge investment balance to hire a financial advisor. In fact, consulting a professional early in your investing journey can help you avoid expensive and regrettable mistakes.
Image: SOPA Images / Getty