Michellevator: Following the internet herd can be dangerous for your wealth

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Welcome to Michellevator, our new series in which a cartoon of journalist Michelle McGagh explains the basics of investing in funds to help take your finances to the next level.

This is a short video but if you can’t watch it now…

Read the transcript

Racy, flavour of the month investments are nothing new, investors have been dabbling in speculative stocks for years, creating some winners but also a lot of losers.  

However, growing concerns about wild west investment practices has led the City watchdog to issue a warning. The Financial Conduct Authority is worried a new breed of young investors is getting caught up in high-risk investing without understanding the consequences. 

They are being swept up in social media-driven excitement around certain stocks. The buzz around US video game retailer Gamestop is a case in point. Its shares were driven higher by an army of retail investors piling into the stock, which being heavily shorted.  

Shorting means fund managers were betting on the stock to fall and some savvy investors on Reddit subforum WallStreetBets had noticed this. They strategised to play the managers at their own game and push the price higher. 

The Reddit rally caused the stock to rocket 900% and some of the ‘Wolves of Reddit’ became paper millionaires overnight.  

This story is very seductive. You can see why young-gun investors want in on the action. But the truth is speculative investments rarely have a positive outcome. More people will lose money than make money, and some Gamestop investors ended up nursing heavy losses. 

The regulator’s concern is that people are gambling with money they can’t afford to lose. Younger people typically have lower levels of financial resilience but despite this they are the most willing to take more risk with their money.  

Part of the problem is many people are blind to the fact they could lose their entire investment. Four out of 10 investors surveyed by the regulator didn’t see losing money as one of the risks of investing.  

The truth is investing is never risk-free so make sure you’re not speculating with money you need – such as your emergency fund or your pension. There’s also no such thing as a sure thing regardless of what investors lurking on social media may tell you, so if you are buying something speculative, only invest what you can afford to lose.  

You wouldn’t trust an internet stranger to diagnose a medical condition for you online. So don’t rely on self-proclaimed investment experts on the web to ensure your financial health.  

 

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