Social media has become an important new source for many people, including for investors looking for ideas to guide their strategy. That said, social media users must be careful when sifting through the vast quantities of information on the web to make sure they’re relying on legitimate sources.
There are a variety of social media platforms that investors use for information, including Twitter, Facebook, LinkedIn, Stocktwits, and even TikTok. While there are potential benefits to using social media to invest, there are also plenty of pitfalls.
Related: What is a collective income rust (CIT)?
Why understanding social media investing is important
In 2013, the Securities and Exchange Commission (SEC) allowed companies to start using social media platforms like Facebook and Twitter to communicate information to investors. As long as companies tell investors which website to check, they can use social media to announce information like company metrics that may influence stock price. Individuals interested in investing in a particular company may want to follow that company directly to stay abreast of breaking news.
Social media can also be an important place to gather information from analysts and financial bloggers who post their thoughts about stocks and news events or upcoming IPOs. Since these folks are typically reacting to news, following them may be a way to stay on top of popular investment trends. More than a third of young investors say that they now use social media to look into possible investments, making it their most popular source of investing information ideas.
Recently, social media has entered the investment space in a new way with the rise of meme stocks. Meme stocks are companies that experience increased volume in trades due to hype on social media. Perhaps the original, and most famous, meme stock is GameStop. Retail investors encouraged each other to buy shares of the company over the subreddit message board r/wallstreetbets to force a short squeeze among hedge fund investors betting against the stock. Together these retail investors drove the share price up nearly 8,000% by late January 2021.
Because investor sentiment rather than company fundamentals often fuels meme stock price increases, they can be extremely volatile. While meme stock investing can be exciting, it can also expose investors to large amounts of risk.
How to use social media when investing
Individuals aren’t the only ones using social media to guide their investing decisions. Fully 80% of institutional investors said that social media is part of their regular workflow. If you want to use social media as a way to inform your investment decisions, there are a few strategies to consider.
1. Follow companies in which you invest (or want to invest)
Directly following a company’s social media accounts ensures the information you receive is timely and accurate.
2. Follow informed experts
Follow news sources, journalists and analysts who cover the companies and sectors, such as healthcare or electric vehicles, in which you’re interested. Consider people who have large followings, which is a good clue that they provide information that is useful to a broad range of investors.
3. Use tech tools
Some brokerages offer social media tools such as social sentiment trackers that aggregate and analyze information that’s posted on social media sites. For example, some firms use software to compile information from Tweets, blog posts and messages. Others offer in-house social media platforms that allow investors to communicate with each other to discuss trading ideas. Or they may offer crowd-sourced research and analysis, using a website or app to gather ideas and opinions from the public at large. For example, analysts, investors and academics might weigh in with their thoughts on earnings estimates.
It’s important for investors to beware that these tools can be inaccurate or misleading. Data gathered from social media may be old, or contain hidden agendas. Read all disclosures offered by social sentiment tools to understand how they collect data and any risks or conflicts of interest.
Social media investing mistakes to avoid
While social media can be a helpful tool for investors, it also has several pitfalls that investors should understand.
1. Impulsive decisions
Information driven by social media, such as discussion boards or buy/sell indicators based on social sentiment can drive investors toward emotional investing, especially when information appears in real-time. Impulsive investments carry additional risks. Trading securities without proper due diligence can lead you to buy stocks as prices are peaking, or sell as prices tumble, locking in losses and missing out on potential rebounds. Avoid allowing social media to feed the tendency to time the market.
2. Failing to do your own research
Think of the information you get from social media as a jumping-off point, something that sparks your interest and leads you to do more research.
For example, if someone posts about how great they think a stock is, take a look at the company’s financials yourself. Look at past and present earnings reports to understand trends. You can find out this and other information on a company’s quarterly report.
Look at the annual report as well. It will let you know about any risks the company foresees in its future. In addition, look at what a number of analysts are predicting the company’s earnings will be in the future.
You may also want to consider broader economic indicators or market measures, such as the Fear & Greed Index.
3. Trusting bots
Bots are programs—not humans—built to engage on social media. It’s not always clear what their agenda is, and they certainly don’t have your best interests in mind. There are several signs that an account could be a bot, including:
- No profile picture
- Strange numbers of characters in the account name
- Posting at irregular hours
- Repetitive, formulaic language
- Repeated posting on the same subject or link
The takeaway
Social media has become an important way to gather investment information. But learning to recognize reliable sources is critical to finding accurate and useful information to create a strategy whether you’re investing in stocks, bonds, options or other financial securities. What’s more, investors must understand the behavioral biases that social media investing can trigger, namely the temptation to time the market.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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10 tips for investing long-term
When it comes to big goals like college tuition and retirement, long-term investing is your friend. Yet, the market can be an uncertain place, and it can be useful to have some guidance to help you navigate it. Consider these 10 tips to help you pursue your long-term goals.
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What your goals are will largely determine whether or not long-term investing is the right choice for you. So you might want to spend time outlining what you want to achieve — which may depend on your life stage — and how much money you’ll need to achieve it.
Once you’ve done that, you can think about your time horizon — when you’ll need the cash — which can help you determine what types of investments are better suited to your overall goals. Investing in the stock market is generally a long-term proposition, which may not always be appropriate for shorter-term goals.
For example, if you are saving to buy a car in just a couple years, you may consider setting aside money in a savings account or money market accounts, which are stable and can provide relatively quick access to your cash.
If you were to invest the same money in the stock market, you are subject to greater market risk, meaning markets could be down when you need to pull out your cash. The short timeframe of your goal allows little time to recover from a downswing.
Stock market investing can be more appropriate for big goals in the distant future, such as saving for a child’s education or your own retirement, which could be 20 or 30 years down the line. This relatively long time horizon not only gives your investments a chance to grow, but it means that you also have the time to ride out market downturns that may occur along the way.
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Your risk tolerance is essentially a measure of your ability to stomach weak markets. It can help you determine the mix of investments that you will hold in your investment accounts.
Your goals and time horizon will play a part in determining your risk tolerance, as will your personal level of comfort. Longer time horizons typically mean that you can have a higher risk tolerance, which in turn means you might be more inclined to hold a greater proportion of stocks inside your portfolio.
This goes back to the idea that the longer you have to stay invested, the longer you have to recover should markets take a dive.
A shorter time horizon means you may prefer to hold a greater proportion of less risky assets like bonds or cash and cash equivalents. These tend to be less volatile, so if the market drops, they are unlikely to drop with it.
Setting your risk tolerance also means knowing yourself. If you’re somebody who will be kept up at night when the market takes a downward turn, even if your goal is still 20 years away, then you may not want a portfolio that’s aggressively allocated to stocks.
On the other hand, if stock market volatility doesn’t bother you, an aggressive allocation may be the best fit to help you achieve your long-term goals.
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Understanding your goals, time horizon and your risk tolerance can help give you an idea of what mix of assets — generally stocks, bonds and cash equivalents—you may want to hold in your portfolio. For example, a portfolio might hold 70% stocks, 30% bonds and no cash equivalents.
As a general rule of thumb, the longer your time horizon, the more stocks you may want to hold. Stocks are the drivers of long-term growth.
As you approach your goal, you’ll likely begin to shift some of your assets into fixed-income investments like bonds. The reason for this shift? As you approach your goal — the time when you’ll need your money — you’ll likely become more vulnerable to market downturns.
For example, if the market experiences a big drop, you may be left without enough money to meet your goal. By gradually shifting your money to bonds you can help protect it from stock market swings, so by the time you need your cash, you have a more stable source of income to draw upon.
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A key factor of any investing is portfolio diversification — the idea that holding many different types of assets reduces risk inside your portfolio in the long and short term. Imagine briefly that your portfolio consists of stock from only one company.
If that stock drops, your whole portfolio drops. However, if your portfolio contains stocks from 100 different companies, if one company does poorly, the effect on the rest of your portfolio will be relatively small.
A diverse portfolio contains many different asset classes, such as stocks, bonds and cash equivalents as mentioned above. And within those asset classes a diverse portfolio holds many different types of assets across size, geographies and sectors, for example.
The basic principle behind diversification is that assets in a diverse portfolio are not perfectly correlated. In other words, they react differently to different market conditions.
Domestic stocks for example, might react differently than European stocks should US markets start to struggle. Or energy sector stocks will react differently than technology stocks. So, if oil prices drop, energy sector stocks might take a hit, while tech might be less affected.
Many investors may choose to add diversity to their portfolios by using mutual funds, index funds and exchange-traded funds, which themselves hold diverse baskets of assets.
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This tip may seem like a no-brainer, but there are very good reasons to start investing as early as you can for long-term goals. First, this can give yourself time to ride out market volatility, as mentioned above.
Increasing your time horizon gives you the opportunity to invest in riskier investments, like stocks, for longer. Though risky, stocks typically offer higher earning potential than other types of investments, such as bonds.
Consider that since it’s beginning in 1926 through 2018, the S&P 500 has had an average annual return of about 10% per year.
Second, the sooner you start investing, the sooner you are able to take advantage of compounding interest, one of the most powerful tools in your investing toolkit. Compound interest is essentially the interest you earn on your interest.
The idea here is that as you reinvest your returns, you are increasing the amount of money on which you earn on returns. As a result, your returns keep getting bigger and your investments can start to grow exponentially.
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Investing is just numbers and math, so it’s totally rational, right? Well…not exactly. Humans are emotional creatures and sometimes those emotions can get the better of us, leading us to make decisions that aren’t always in our best interest. Letting emotions dictate our investing behavior can result in costly mistakes.
For example, if the stock market starts to drop, you may panic and be tempted to sell your stocks. However, doing so can actually lock in your losses and means that you miss the subsequent rally.
On the other end of the spectrum, when the stock market is roaring, you may be tempted to jump on the bandwagon and overbuy stocks. Yet, doing so opens you up to the risk that you are jumping on a bubble that may soon burst.
There are a number of strategies that can help these mistakes be avoided. First, fight the urge to check how your stocks are doing all the time. There are natural cycles of ups and downs that can happen even on a daily basis. These can cause anxiety if you pay attention too closely. You might want to avoid constant checking in and instead keep your eye on the big picture — achieving your long-term goals.
Trust your asset allocation. Remember that it has already taken your goals, time horizon and your risk tolerance into consideration. Tinkering with it based on spur-of-the-moment decisions can throw off your allocation and make it difficult to achieve your goals.
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Be wary of taxes and fees as these can take a hefty bite out of your potential earnings. Mutual funds are a common, actively managed tool for investing. To cover the cost of management, mutual funds may charge an expense ratio — a percentage based on the total assets invested in the fund each year.
The expense ratio is deducted directly from your returns. So, if the mutual fund earns 7% in a given year, and the expense ratio is 1%, your actual earnings are only 6%.
You may also encounter annual fees and custodian fees. Annual fees can be as high as $90 per year. Custodian fees — usually charged by retirement accounts to cover reporting costs — can be as high as $50 each year.
You can also be charged fees for buying and selling assets as well as commissions that are paid to brokers for their services.
It’s important to manage these costs, as they can eat away at your ability to save over time. One of the best lines of defense is doing your research to understand what fees you will be charged and what your alternatives are.
For example, you may want to choose mutual funds with the lowest expense ratios, or you may consider passively managed index funds that charge very low fees. Selling stocks can expose you to short-term or long-term capital gains tax. Short-term capital gains tax — which is equal to your income tax rate — is owed when a stock is sold after being owned for a year or less.
Long-term capital gains tax — equal to 0%, 15% or 20%, depending on the tax bracket — is owed on assets that are sold after they’ve been held for a year or more. Limiting how often stocks are sold may limit the amount of capital gains tax owed.
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There are a few long-term goals that the government wants you to save for, including higher education and retirement. As a result, the government offers special tax-advantaged accounts to help you achieve these goals. A 529 savings plan can help you save for your child’s — or anyone’s — college or grad school tuition.
Contributions can be made to these accounts with after-tax dollars. This money can be invested inside the account where it grows tax-free. You can then make tax-free withdrawals to cover your child’s qualified education expenses.
Your employer may offer you a 401(k) account through your job. These accounts allow pre-tax dollars to be contributed, which lower your taxable income and can grow tax-deferred inside the account.
If your employer offers matching funds, you could try to contribute enough to receive the maximum match. When you withdraw money from your 401(k) at age 59 ½, it is subject to income tax.
You may also take advantage of traditional IRAs and Roth IRAs. Traditional IRAs use pre-tax dollars and allow tax-deferred growth inside your account. Withdrawals at age 59 ½ are subject to income tax.
You fund Roth IRAs, on the other hand, with after-tax dollars, so money in your account grows tax-free, and withdrawals are not subject to income tax. IRAs provide more flexibility in terms of investment options than a 401(k).
Usually, 401(k)s offer limited investment options through your employers, whereas you can hold diverse investments from stocks and bonds to real estate inside an IRA.
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One way to continually add to your investments is by making saving a regular activity. One easy way to do this is through automation. If you have a workplace retirement account, you can usually automate contributions through your employer.
Or, if you’re saving in a brokerage account, you can arrange with your broker for a fixed amount of money to be transferred to your brokerage account each month and invested according to your predetermined allocation.
Automation can take the burden off of you to remember to invest. And with the money automatically flowing from your bank account to your investment accounts, you probably won’t be as tempted to spend it on other things.
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You may want to periodically check in on your portfolio to make sure your asset allocation is still on track. If it’s not, it may be time to rebalance your portfolio. You may want to rebalance when the proportion of any particular asset shifts by 5% or more.
This could occur, for example, if the stock market does really well over a given period, upping the portion of your portfolio taken up by stocks.
If this is the case, you might consider selling some stocks and purchasing bonds to bring your portfolio back in line with your goals. Periodic check-ins can also provide opportunities to examine fees and other costs and their impact on your portfolio.
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When you’re ready to invest, whether through retirement accounts, brokerage accounts, by yourself or with help, these strategies can help you build an investment plan to match your financial situation.
This plan accounts for your individual needs and your unique investment style, and sticking to it can help you achieve your long-term objectives.
Learn more:
- Strategies for building an investment plan for your child
- When can I retire? This formula will help you know
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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