contrarian investing Archives

If you want to know what your friends are up to, look at funny pictures of cats, or scope out deals at your favorite stores, social media is a great tool. More and more people are turning to social media for other things as well, such as help with making investment decisions. A look at the specifics of how people use social media to shape their investment plans can help you decide if such an approach is right for you.

Younger People Lead the Way

Image via Flickr by thetaxhaven

The results of one survey published at marketwire.com revealed that the group most likely to use social media to make investment decisions is people under 40. The same survey found that this age group is three times more likely to believe that information received through social media is credible than other age groups. Overall, 40% of investors use social media as part of their financial game plan, and that number is likely to continue growing.

It isn’t just the young and the folks with limited assets who look to social media. Individuals with a high net worth are also seizing hold of the trend. As stated at hewinsfinancial.com, another survey found that “high net worth adults that are online are using social media for investing purposes at a rate that is higher than the general population!”

It becomes clear that investors want social media to impact their investment decisions. As financial advisory firms and other companies take note of this, they are more likely to use social media as a way to connect with clients.

How Businesses Use Social Media

Image via Flickr by Jason Howie

A report released earlier this year by the SEC states, “companies can use social media outlets like Facebook and Twitter to announce key information…so long has investors have been alerted about which social media will be used to disseminate such information.” This go-ahead opens the door for increased company-investor communication.

Financial advisors are taking full advantage of the opportunity presented by social media. A survey conducted by Accenture found that out of 400 financial advisors, 73% said that social media has led to an increase in client transactions and 77% said that it helps with client retention. Indeed, social media helps financial advisors communicate efficiently and easily with clients, and it makes the task of keeping up with industry news easier.

How Investors May Misuse Social Media

With the above being said, it’s obvious that the world of social media has a lot of sound information to offer to investors. When financially savvy individuals stick to official, reliable sources, they stand to benefit from their social media experience.

However, a note of caution is in order. If you follow the link to the Hewins Financial website included earlier in this article, the page it takes you to has an introduction all about how emotions can negatively impact your investments. One of your friends boasts on social media about an investment that paid off, and you decide to invest in the same stocks, just when those stocks are about to fall. Eventually you get locked into an unprofitable cycle of buying at high prices and selling at low prices.

In another scenario, the buzz on social media about a certain investment might make you doubt official sources of information. If all your friends on Facebook say one thing, but an official source says something to the contrary, which are you likely to believe?

Should Social Media Impact your Investment Plans?

When considering the pros & cons of annuities — resources for any type of investment, really — take the time for introspection. What are your specific long-term and short-term financial goals? Who do you trust to help you with those goals? Once you have a clear picture in mind, start searching for information.

For every source of information, ask yourself, “Is this advice coming from an expert, or did Great Aunt Helga just get over excited about her portfolio?” “Is this information up to date?” “What is this source’s motivation?” Tweets, blogs, and status updates from well-reputed experts and financial advisory firms are the best places to look.

If you’re new to the world of investing, don’t make any of your decisions based on what you see on social media. Educate yourself about the basics of investing, and don’t be afraid to meet face to face with a financial advisor. If you decide to trust that advisor, look for that person’s company’s social media sites.

As social media steps into more and more aspects of daily life, it becomes increasingly important to know the advantages and the potential pitfalls that can come from it. Keeping your emotions in check and your goals in front of you will help you make wise decisions.

So, Sandy @ First Gen American asked a bunch of finance writers to participate in a writing experiment. We have to write about a personal finance topic by using monkeys as the theme. I then began to think about one of my favorite facts about monkeys. The contrarian strategy which they employ to open a banana!

As you can see in the video below, monkeys open bananas from the opposite end than humans. Instead of fighting with the stem and having to involve a knife (or teeth), they just softly pinch the opposite end and then peel back.

Unfortunately, I couldn’t find a video of a monkey pinching a banana, so this human will have to do:

Someone taught me this a few years ago, and it has changed my life! Ok, that’s a bit of a stretch, but it has lowered my level of frustration when eating a banana. So, how does this relate to personal finance, you ask?

Using a Contrarian Strategy

In many walks of life (especially finance), going along with the popular way of doing things (or thinking) can be dangerous. In personal finance, it is always best to question every move to ensure that it makes sense for you.

Many financial decisions are made based on emotion and the herd mentality! We see many people performing a certain action, and we feel as though that is what everyone is supposed to do.

Just like the idea of peeling a banana from the stem, we end up wasting time and energy attacking a situation from the wrong end.

Be A Monkey When Finding A Place To Live

Take buying a house for example. Many people have become convinced that this is the right thing to do, simply because “everybody else does it”, or “it’s what you do when you become mature and stable”. People actually borrow money to gain shelter, borrow money to furnish it, then borrow more money to make expensive, unnecessary, cosmetic changes; and after all of this, they have the nerve to call it an “investment”!

However, we need to be like these monkeys and decide if that’s the best way to handle our need for shelter! Would it be better to be patient and take the path of least resistance? Rent a property until it makes financial sense to buy one!

Be A Monkey In School

Does it make sense to go into college directly after high school? For some, yes. However, this shouldn’t be an automatic decision that we make without proper analysis. Many high school graduates jump directly into college with no savings, no scholarship, and no support! But, since they have been told that this is the normal progression in life, they take on tens of thousands of dollars worth of student loans!

Much of the time, they have no idea what they want to study, or what they want to do with their lives. They just follow the herd and apply to college. Even the ones who have an idea about what they want to do, fail to count the costs of attending college with little to no savings! They just go and assume it will work itself out in the end.

However, we need to think back to the [mighty] monkey and attack this problem from a different angle. Before filling out those loan applications, do a little math to see how long you’ll be paying off those loans, and what benefit they will have.

You might find that it’s better to take a job directly out of high school (actually, while in high school), and save up for college – or even go to a 2-year school first – rather than being in bondage to student loan repayments for 10 or 20 years after graduation!

Use A Contrarian Strategy When Investing

Warren Buffett once stated that investors should “try to be fearful when others are greedy and greedy when others are fearful“. I’m definitely not suggesting that we go around following Buffett blindly, but he does make a good point. When people are chasing after a certain stock, commodity, or industry, that’s usually the time to run away (or short that investment)! Then once people are running away from those investments (after the irrational exuberance wears off), then that’s when you consider them as viable investments (paying attention to valuation, of course).

One contrarian strategy that has actually become quite popular as of late (possibly taking away part of its effectiveness) is to invest in gold coins and other precious metals. Gold is usually looked upon as a hedge against economic turmoil. For a long time, the most prominent method of investing in gold was through derivatives, therefore limiting the amount of people who were able to take meaningful positions. However, with the rise in gold mutual funds and ETFs, we are seeing more “everyday investors” getting in on the action.

Instead of just choosing what everyone else chooses (such as a 60/40 split, or saving 15% for retirement), look at your situation and make the choice that’s best for you! If you find it’s easier to peel the banana from the stub, while 95% of the investing world is still fighting with the stem, then ignore those who are “smarter” and move toward your goal!

photo by wwarby

Final Thoughts

Personal Finance is named that for a reason. In many cases, one-size-fits-all solutions do not exist. In those instances, it’s best to be a good monkey and look at the full picture. You may find that the answer lies at the other end of the peel!