Investors are increasingly turning to social media for information before deciding where to allocate their portfolio, which could lead to more “emotional” decisions, new research has found.
A survey commissioned by behavioural finance experts Oxford Risk found that nine per cent of investors have increased their use of social media more than any other information resource over the past year to help manage their investments.
Seven per cent of 1,008 UK adults said they now regard social media as their most important source of information before investing.
“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,” said Greg B Davies, PhD, head of behavioural finance at Oxford Risk.
“Investors need to base their decisions on long term views with a realistic view of their goals and attitudes to risk.”
Seven per cent of UK investors say they use Facebook as a source of information for their investment decisions, while six per cent use Twitter and five per cent use LinkedIn.
Younger investors are particularly likely to use social media to help guide their decisions. For those aged 18 to 34, 20 per cent say social media channels are the most important sources of information for managing their investments, compared to four per cent of those aged 35 to 54 and four per cent of investors aged 55 and over.
Oxford Risk argues that many retail investors make decisions based on emotional comfort and estimates that this typically costs them three per cent in lost returns per year.
However, due to the increased level of market volatility during the pandemic and the higher level of emotional decisions at this time, the cost of this could be much more, Oxford Risk said.
Many investors have increased their allocation to cash due to this market volatility, which Oxford Risk estimates will cost them around four per cent to five per cent per year in lost returns over the long-term.
Oxford Risk builds software to help wealth managers and other financial services companies help their clients make financial decisions. It 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 research into investor psychology and financial wellbeing. The service also provides personalised recommendations on how best to invest, which are based on the findings.