Getting Your Financial Advice From TikTok and Reddit? That Could Backfire

Jakub Porzycki | NurPhoto | Getty Images
  • More people are getting their financial advice from platforms like TikTok and Reddit.
  • But it can be hard to verify whom you're listening to and if you should be.

It can be hard to look away from the constant stream of financial success stories and tips on TikTok, YouTube, Reddit and other social media platforms.

Users on WallStreetBets and other forums brag about the tens of thousands of dollars they've made over short periods of time by buying up the "meme stocks" that hedge funds have bet against. It's clearly a compelling story: Hollywood is already planning a film about the pack of rogue investors who've shot up the share price of GameStop.

When it comes to deciding how to spend your hard earned money, however, such intrigue and drama can be a red flag.

"Good investment advice is boring," said Barbara Roper, director of investor protection at the Consumer Federation of America. (She ticked off some of the time-tested truisms: Invest for the long-term. Diversify. Use low-cost mutual funds.)

To be sure, many of the videos on Personal Finance TikTok, which have been viewed by more than 3.5 billion people, carry helpful tips on budgeting and climbing out of credit card debt. Yet it's often content that promises more immediate wealth that gets more clicks.

More from Personal Finance:
How Biden's $1.9 trillion relief plan would avert a looming benefits cliff
One year after Covid in America: A financial snapshot
What to know if you still haven't received your $600 stimulus check

As a result, the platform is overflowing with creators making market prognoses and encouraging you to buy certain stocks or cryptocurrencies so you can make a killing like they have.

Don't expect to be able to copy their results, experts say.

"People never recognize they're making profits based off luck," said Andreas Park, associate professor of finance at the University of Toronto.

Park's research has found that the average day trader loses money because they tend to buy and sell too late, and don't necessarily do either for much sound reason.

On the other hand, as much frustration as some may feel toward hedge funds, they weren't betting against GameStop shares for nothing, Park said. He pointed out that the value of the chain of video game stores is expected to wane as strip malls across the country shutter and people make more of their gaming purchases online, from the comfort of their home.

Still, people can put a lot of faith in the advice they get online, particularly when it's found on forums or platforms they frequent and feel fondly towards.

"Social media gives you an illusion of intimacy where it doesn't exist," Roper said.

In reality, however, you have no way of knowing whether the person on Reddit telling you to invest in GameStop is actually dumping their own shares as they speak, Roper cautioned.

And while there are ways to vet traditional financial advisors, it can be impossible to find out the intentions or possible conflicts of interest of someone spewing advice online.

On the internet, it can be helpful to go against your instincts, said Dr. Brad Klontz, a psychologist and certified financial planner. Market bubbles are powered by a herd mentality, which social media only intensifies, he said.

"For thousands of years, if you were left behind by the tribe, you could die," said Klontz, who's also associate professor of practice in financial psychology and behavioral finance at Creighton University Heider College of Business. "So when we feel the tribe is moving away and we're not with it, it causes an existential panic.

"Be aware of how we're wired," he added. "It'll keep you from making the classic financial mistake of buying high and selling low."

Copyright CNBC
Contact Us