Social media has empowered a new generation of investors, giving them access to information, self-learning tools and peer-to-peer sharing in ways that have never existed before. But for all the benefits that access brings, the kaleidoscopic lens of social media, combined with a fear of missing out (FOMO), can lead to some risky investment decisions.

“There's been a shift in trust,” says Oliver Saiman, senior director of relationship management at RBC Wealth Management in London. In the past, brokers, analysts and fund managers were the voice of the markets – a group seen as qualified, regulated and sufficiently experienced to offer advice. But the status quo is being disrupted, says Saiman, whether by prominent social media influencers or certain Twitter-savvy CEOs whose announcements have the potential to impact public markets including cryptocurrencies.

“It's fallen to a whole different demographic... someone with an influential blog or social media channel [can] share their views very widely,” says Saiman. “You don't have to be a prolific financial professional [anymore] to get your voice out there – these other kinds of influencers can have a big impact.”

Saiman says it's a trend that's only going to increase: “I think it's becoming ever more important for clients to understand this emerging dynamic more deeply.”

Understanding the hype

The GameStop short squeeze serves as a prime example of the changing investment dynamic lead by social media. A short occurs when investors borrow a security and sell it on the open market in hopes the price will drop and they can buy it back later for less. A short squeeze is when a shorted stock's price does the opposite, rising beyond what it was borrowed for. That's what happened in Jan. 2021, when a group on the social news site Reddit's subreddit r/wallstreetbets noticed that GameStop shares were heavily shorted by investors including several large hedge funds.

Seeing an opportunity, the subreddit started to pile up on GameStop stocks, explains Juan Aronna, head of investments at RBC Wealth Management covering the British Isles and Asia. “This is powerful because now we have 10.7 million followers of r/wallstreetbets, which doubled since the Gamestop saga began.”

Collectively, they initiated the short squeeze forcing many of the short sellers to remove their short positions and buy shares, kicking off a price surge that pushed the stock from $3 to more than $400 per share – a 2,300 percent increase – causing major losses. “One hedge fund manager, in particular, lost $12.5 billion,” says Aronna. “So what does this tell us, really? Well, the old power by hedge fund managers, a centralised force, has been challenged with this crowd of investors, a decentralised one.”

The fundamentals of GameStop as a business didn't really matter, he adds. For the group of investors on r/wallstreetbets, it was about employing some of the tactics used by institutional investors to benefit individual investors, many of whom were first-time investors. And it was all done using social media and investing apps.

Aronna points out that a decade ago, retail investors accounted for about 10 percent of equity traders in the United States. Now, with help from investing apps and digital forums, they make up about 20 percent. “They're becoming a considerable force and it can be expected that this type of thing will happen again.”

A place in the portfolio

Social media has a tendency to amplify success stories. That's why it has the ability to inspire that deep FOMO. People felt that with GameStop and they feel it with cryptocurrency. “Everyone loves the story about the guy who makes a million dollars buying Bitcoin [or] making lots of money on a volatile stock because they've taken the punt…it's a very appealing concept – like gambling,” says Saiman. “Whereas your average individual who invests a small amount into Bitcoin, sees it drops 30 percent and then sells it – people don't talk about that enough, but it's so much more common.”

When you strip it back, says Saiman, that initial FOMO is a knee-jerk reaction to a deeper theme. We're constantly exposed to a rapidly evolving digital world and it makes sense to want to find a way to invest that captures that apparent growth. Like the GameStop saga, cryptocurrencies like Bitcoin are widely discussed via social media, and if you're present on social media or even read the headlines, it's hard to avoid.

Saiman explains how he put together an investment strategy for the third generation of family wealth - two daughters who were involved in different businesses: “They're both extremely sophisticated in what they do,” says Saiman. “They were very interested in understanding how they should invest their money in order to grow it over the long term. They wanted to protect what the family had and to make sure the wealth pot effectively funds that family's lifestyle going forward.”

As the strategy was on the verge of being executed, Saiman says RBC Wealth Management was approached by the daughters who suggested including an allocation to cryptocurrency.

“It was an interesting development because they hadn't mentioned it until this point,” says Saiman. Saiman's team had a call with the clients to discuss, and through it realised the interest in cryptocurrencies actually had nothing to do with cryptocurrencies themselves, rather, it was about investing in emerging technologies and “gain exposure to technology that could be extremely influential in the future.”

Saiman says they pulled together an allocation of the portfolio devoted to sustainable technology - or SusTech, fintech and emerging technologies like blockchain, the underlying infrastructure that makes cryptocurrencies possible. “We incorporated that sort of satellite allocation [into] that main investment portfolio, which was a little bit more traditional in nature, effectively giving them a foothold in early-stage technology in some interesting areas,” he says. “That approach really resonated with them.”

Understanding urgency

Saiman says the client's sense of urgency surrounding emerging areas such as cryptocurrencies isn't uncommon and urgency certainly has a role to play in investing. “Our clients come from all walks of life, and a large proportion of them are extremely financially sophisticated. They'll come across opportunities in their work life and their personal life,” says Saiman. Decisions often need to be made in a timely manner. But rationale is also key. Values matter, and whether the investment relationship between wealth manager and client is advisory or discretionary, Saiman says it is important that investment decisions don't simply address a single trade idea, but how that idea fits within a wider plan or goal.

“Gone are the days when the role of a wealth manager was to simply take instructions and execute,” he says. “Clients like to be challenged by us and they like having us say to them, 'Look, is this something that you really want to do, and if so, why?' ”

Social media has helped democratise access to investment insight and has empowered the average retail investor. The key to capitalising on emerging technologies and ideas is investors arming themselves with as much information as possible to make an educated choice.

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