Forget sourcing stock market advice from an experienced financial planner or your savvy Aunt Lisa. For many beginner investors, they’re following guidance from a new source: influencers on TikTok and other social media platforms like Reddit and Twitter.
It’s easy to figure out why. Stock tips proliferate online. Conversations using the hashtags #fintok and #stocktok have garnered hundreds of millions of views on TikTok this past year with everyone from 15-year-olds to astrologers giving meme stock and cryptocurrency tips. Many of these so-called experts have little financial education themselves. But users are putting those frothy tips to use, jumping on the bandwagon to trade (and trade) using apps like Robinhood, which offer commission-free trading.
It’s a trend that worries Christopher Dewdney, a certified financial planner and principal at Dewdney&Co. in Toronto. He remembers when an investor would have to go to a stockbroker or mutual fund representative and open an account to trade securities.
“Now you can lie in bed with your iPhone and open an account in a matter of minutes and start trading,” he says.
With that kind of ease, it’s little wonder meme stocks, or shares of companies that experience surges of viral activity, created frenzies earlier this year. Think GameStop, AMC, Bed Bath & Beyond and BlackBerry. Their stock prices soared as investors – many of whom were stuck at home and bored during the pandemic – piled on. Today, these once-hot stocks are still relatively volatile, rising and falling, often without any clear reason why.
“For me as an advisor, it’s fascinating to watch, but it’s also disheartening because a lot of people are getting hurt. They’re gambling,” says Dewdney, pointing out that popular trading apps lean on gamification to entice users to trade often. The dings, beeps and phone notifications are meant to keep you engaged… and spending.
While older investors are starting to trade meme stocks too, for the most part it’s still a Gen Y and Z world, so some might wonder what the harm is. Aren’t young investors allowed to take on more investment risk, and even lose money in their earlier days because they have many more years to bounce back? Fred Masters doesn’t think so. President and founder of Masters Money Management, a financial literacy organization in Kitchener, Ont., Masters teaches teens and young adults how to make good financial decisions over the long term.
“Bad investment decisions can destroy your financial future and bring constant worries into your world,” he says. “Haphazardly buying this or that stock on a whim is a recipe for financial disaster.”
Just consider what it actually means to lose $1,000 on a bad trade at the age of 20. If that money had been left in an investment account earning seven per cent interest until age 60, it would have grown to more than $16,300.
Young investors should use that lengthy time horizon to their advantage and follow the usual (albeit un-trendy) advice: Invest early, often and diversify. In other words, start as soon as you can, set up an automatic investment system and don’t put all your eggs in one basket. Masters recommends investing in global balanced index funds with low fees to check all the boxes.
“Saving methodically after each pay period for decades sets the table for financial success,” says Masters. “Speculating on the latest stock doesn’t really fit into this plan.”