Social Media – Helping or Hurting Your Investment Behavior?

During a recent client meeting we ended up on the subject of social media, and the effect it can have on a business. Unfavorable press coverage led to an echo of bad news on social media among this client’s customers, and it was continuing to harm his business with no end in sight.

I was curious about the public’s persistent reaction, and why he believed the story was still in the news cycle many weeks later. Was his customer base being fickle? Were competitors spreading false and redundant stories? His response: social media. Once a key marketing strategy for his company, social media has quickly turned into a sore spot.

He explained that as the public hears about small incidents, they turn to social networks to share the information, which is then amplified and repeated, creating a snowball effect. Suddenly isolated incidents create nation-wide panic. The small problems become bigger than expected and a stampede occurs.

As a financial advisor I started thinking about how this applies to investors. Consider both DIYers and new investors, those who are not deeply grounded, long-term, experienced investors. Could social media be driving investors toward short-term thinking? Could it be the volume and loudness of media in general? Could this be pushing investors to make choices detrimental to the longevity of their wealth?

If so, what could the long-term consequences of all this noise be on investors? Consider the past few months of daily volatility. Of the first 48 days of 2016, 26 of those days (over half) had over a +/- 1% change, according to LPL research. That is daily volatility. So, what causes this?

Since 1980, the S&P 500 has had corrections or declines of around 15% nearly every year. (The actual number is -14.2%) There are times when these little corrections have not occurred, most noticeably in the years that immediately followed the Great Recession of 2009.

But this trend is not unheard of. When we go through a long period of negative returns, markets have historically rallied for an extended period of time with few corrections. So in August of 2015, we finally had a slight correction (-12.7%) what did investors do? Many investors sold their investments and ETFs in droves.

Then 2016 rolls in and brings with it a correction of -14.2% (Exactly the average decline over the past 35 years), and results were six straight weeks of net redemptions of equities.

Once again, the public is doing the opposite of successful investor behavior. As the markets rise my prediction is we will see the public slowly buying back in again, buying “high” and completing the circle of everything investors are NOT supposed to do.

I believe the media is generally harmful to investor behavior. It encourages investors to do the wrong thing – sell when prices are low (brought on by the fear emotion), and buy when prices are high (brought on by the greed emotion) all perpetuated by the media, including social media.

The real problem is investor behavior, reacting to the emotions of fear and greed brought on in great deal due to the media, social or otherwise.

So the next time you see a catchy headline or hear from a friend about some sensationalized story, stop and think: is this material designed to inform and educate, or gather attention and instigate a reaction? Your answer might surprise you.

If you would like to have a conversation about our philosophy and strategy to help investors make wise choices with their resources, give us a call. Likewise, if you know of a friend of family member who might benefit from this reminder about investor behavior, please forward this email to them.

Thank you for being a client of Prosperion Financial Advisors.