Are you investing under the influence?

A growing army of self-appointed investment 'experts' are luring the unwary into high risk, unregulated products

Influencers all over Facebook, Reddit, Instagram and TikTok are talking up potential investment returns on assets without explaining the enormous risks. Getty

Investing for the future is one of the most important things you will ever do, so you need to be sure the right people are influencing your decisions.

Unfortunately, too many have fallen in with the wrong crowd, allowing social media “influencers” to decide where and how they invest.

A growing army of self-appointed investment “experts” are luring the unwary into ultra-high risk, unregulated products such as cryptocurrencies, foreign exchange and internet meme stocks like AMC and GameStop, despite having no financial training, qualifications or regulatory approval.

They are all over Facebook, Reddit, Instagram and TikTok, showing off their luxury lifestyles, flashy cars, fancy apartments and exotic holidays, or swapping stories about how day traders have become instant millionaires.

The TikTok hashtag #Bitcoin has received 4.4 billion views to date, while #cryptocurrency has had 1.5 billion, #investment 790 million and #stockstobuy 447 million.

Some call it the “gamification” of investing and young people are particularly susceptible, often losing the little they have by trading on easy-to-use investment apps. Some have upped their risk level to dizzying heights by borrowing to invest.

Many have abandoned traditional methods of building wealth in favour of the untried and unproven, or downright dangerous.

Research by consultancy Platforum found that 41 per cent of new investors hold cryptocurrency, but only 17 per cent put money into investment funds.

Influencers talk up the potential returns without explaining the enormous risks, Anthony Morrow, founder of financial advice service OpenMoney, says. “If you follow them, you are at real risk of losing your money.”

Regulators are waking up to the danger but policing the internet is never easy, so you need to be on your guard against get-rich-quick schemes and outright scams.

TikTok has now announced a global ban on the promotion of financial products and services on its platform, including cryptocurrency, forex, pyramid schemes, investment services and get-rich-quick schemes.

This follows Google’s decision to ban financial adverts by unregulated companies from September 6, but only in the UK.

Banning content is one thing, identifying and removing it is another, Mr Morrow says. The threat isn’t going to disappear overnight, so be on your guard.

The pandemic has created a new breed of investors, who have been locked at home with time on their hands, and have turned to investment apps for entertainment, says Vijay Valecha, chief investment officer at Century Financial in Dubai.

Many have witnessed the stock market’s “amazing comeback” since the lows of March last year and want a piece of the action.

TikTok has announced a global ban on the promotion of financial products and services on its platform, including cryptocurrency, forex, pyramid schemes, investment services and get-rich-quick schemes. Bloomberg

“The US brokerage industry added roughly 10 million new clients last year and the retail trading boom has continued through 2021. More than half of new investors are millennials,” Mr Valecha says.

Millennials don’t want to sit through dry seminars teaching them how to craft a balanced portfolio of shares, bonds, cash and commodities, but want to learn about investments in a fun and easy way on social media platforms, he says.

Unfortunately, influencers give a rosy view of how much you can make from investing, and how quickly. They whip up prime investor emotions: greed and fear of missing out, or Fomo.

“Scrawling through pictures of somebody who has made a fortune on Instagram is likely to make you feel frustrated with your own life, but making fast money from day trading is not the way to improve it,” he says.

Another danger is that when new investors lose big money, they may quickly become disillusioned and view all forms of investing as a gamble, and shun stock markets altogether, Mr Valecha says.

Scrawling through pictures of somebody who has made a fortune on Instagram is likely to make you feel frustrated, but making fast money from day trading is not the way to improve it

Vijay Valecha, chief investment officer, Century Financial

“They leave the money in a ‘safe’ savings account earning next to no interest, to their long-term detriment.”

The sensible way to build your long-term wealth is to invest in a spread of stocks and investment funds covering different sectors, regions, markets and asset classes, says Chaddy Kirbaj, vice director at Swissquote Bank Dubai.

If you have to be influenced by anybody, follow the great investors whose words of wisdom can be found all over the internet, such as Peter Lynch, John Templeton, Jack Bogle and Warren Buffett.

Tesla founder Elon Musk does not number among the great investment gurus, Mr Kirbaj says. His tweets can move markets, but not in a sane or rational way. Note how he first talked up Bitcoin, sucking investors in, then talked it down.

“Mr Musk’s favourite cryptocurrency, Dogecoin, plunged from $0.70 to $0.17 in just one month, inflicting huge losses on unsuspecting investors,” Mr Kirbaj says.

If you had invested $10,000 in the dog-meme currency at its peak, you would now have around $2,500. If you borrowed that $10,000, as many do in a process known as leveraging, then you have a problem.

The best way to build wealth for your future is to invest, rather than speculate, and too many confuse the two, says James Norton, head of financial planners at exchange-traded fund manager Vanguard.

“Investing is about participating in stock markets for the long term, with a clear goal and in a disciplined manner. Speculating is akin to buying a lottery ticket, you are taking a bet and hoping. It’s no way to invest for your retirement,” he says.

There is an awful lot of online noise about ultra-high-risk investments such as cryptocurrency and forex, so don’t be distracted. “Tune out the noise and stay the course,” Mr Norton says.

Investing is about participating in stock markets for the long term, with a clear goal and in a disciplined manner

James Norton, head of financial planners, Vanguard

Try to do that before you lose big money, rather than afterwards.

Let’s not be too boring about this. It is fine to have a bit of fun with meme stocks or crazy cryptocurrencies, provided you only do it with a small amount of your invested wealth, no more than 5 or 10 per cent of the total.

That way, you limit your losses if your bet turns out to be a bad one, which is highly likely, says Rob Morgan, investment analyst at Charles Stanley Direct.

Gambling isn’t good for your wealth, and it isn’t good for your mental health either. “Done properly, investing shouldn’t send your pulse racing,” he says.

When reading about investment online, always keep in mind who is sending you tips and advice, Mr Morgan says.

Many influencers urge followers to sign up to expensive courses, which claim to teach people to make their own fortunes but pass on little value.

Others generate commission every time they persuade a follower to invest via an online trading platform, in the same way that health and beauty influencers receive money for plugging top brands.

They are focused on building their brand, rather than your wealth.

Don’t follow the herd, Mr Morgan says. “Some have made money out of AMC and GameStop, but a lot more will have lost it.”

Winners like to flaunt their gains. Losers typically keep quiet, yet they are in the majority.

Beware outright scammers, who have also thrived in the pandemic, Mr Morgan warns. “Never part with your cash or hand over personal or financial information without knowing exactly who you are dealing with,” he says.

There is a mountain of sensible financial advice on the internet. Alternatively, pay for independent financial advice. A good adviser can put in place a bespoke, personalised plan to build your wealth, rather than direct you to the casino.

Gambling can destroy your wealth, while investing builds it. So always keep a clear head and never believe everything you see online.

Updated: July 19, 2021, 5:00 AM