Retail investors' increasing reliance on social media could lead to poor investment decisions
A new survey by behavioural finance experts Oxford Risk reveals the increasing influence social media has on UK investors, with 7 per cent saying they use Facebook as a source of information for their investment decisions.
Similarly, Twitter is used by 6 per cent of investors and LinkedIn by 5 per cent.
Oxford Risk warns that an over-reliance on social media makes users increasingly susceptible to a plethora of conflicting emotions that can leave investors confused. It increases the chances of them making ‘emotional’ decisions when managing their investments, which invariably ends in them losing money.
The research found nearly one in 10 investors (9 per cent) say that over the past year, the source of information that they have seen the biggest increase in their use of to help manage their investments is social media. Some 7 per cent now regard it as their most important source of information.
For younger investors, the importance of social media is even greater. For those aged 18–34, 20 per cent say social media channels are the most important sources of information for managing their investments, and this compares to 4 per cent of those aged 35–54 who think this, and 4 per cent for investors aged 55 and over.
Greg B Davies, PhD, Head of Behavioural Finance, Oxford Risk, says: “The quickfire comments seen on social media are far too often based on amateurs’ knee-jerk responses to market fluctuations, which leads to all kinds of bad decisions and losses. Investors need to base their decisions on long term views with a realistic view of their goals and attitudes to risk.”
Oxford Risk believes many of the decisions made by retail investors are for emotional comfort, and it estimates that on average this typically costs them 3 per cent in returns a year. However, given the increased level of market volatility during the pandemic, and that the level of emotional decisions made by investors in terms of managing their portfolios has increased dramatically, the cost of this will be more – in some cases it will be much higher.
Oxford Risk says many investors have increased their allocation to cash during these volatile times for markets, and the cost of this ‘reluctance’ to invest is around 4 per cent to 5 per cent a year over the long-term.
Oxford Risk builds software to help wealth managers and other financial services companies assist their clients in making the best financial decisions in the face of complexity, uncertainty, and behavioural biases. However, it says that many wealth managers and financial advisers are poorly equipped to help clients deal with the emotional and psychological roller-coaster ride their clients have endured during the COVID-19 crisis, and the impact it has had on markets and their investments.
Oxford Risk has launched a free Market Emergency Survival Kit which allows retail investors to measure six key dimensions of financial personality, which the company has identified through extensive research into investor psychology and financial wellbeing. The service also provides personalised recommendations on how best to invest, which are based on the findings.
The company says there are behaviours that are common to many investors at such volatile and uncertain times. During a crisis, investors are likely to focus too much on the present and on the detail, feeling compelled to do something even when sitting tight is the best solution. They can gravitate towards the familiar – often leading to underinvestment, selling low, or decreased diversification.