Investors: Meet social media

April 11, 2011

Dan Greenshields REUTERS/HandoutDan Greenshields is President of ShareBuilder Securities Corporation, a subsidiary of ING Bank. The opinions expressed here are his own.

In the beginning, naysayers and curmudgeons dismissed social media as a place for gossip, celebrity self-promotion and teenagers to waste time. How wrong they were. Social media is reshaping the political world, how we talk to friends, and the way we simply get information.

But what about our money, especially our investments?

Sure, “everybody” is on Facebook and uses Twitter these days, and for many of us, they are the main way we share information. But when it comes to your financial investments, you need to be especially careful about the information flowing through social media and how you interpret it.

I generally have a rule that good investment ideas can come from anywhere. However, don’t count on polling your social media friends and followers for advice about investment strategies the same way you might ask your social network about their favorite movie or song. Today, Twitter and Facebook are teeming with investment advice. The recommendations are coming not only from proven Wall Street money managers, but also from paid product endorsements and celebrities. Sorting out the good advice from the bad is a serious challenge. Investors need to be taking in information from this fledgling new media outlet with their eyes wide open.

So, how do you — a plugged-in investor who just wants to get your retirement plan or college fund moving in the right direction — navigate through this brave new world of information and recommendations? Let’s break down a few rules of social investing.

Know yourself first

For starters, focus on what matters to you. At the most fundamental level, you know what you want your money to do for you. You know how much risk you’re comfortable with and what type of risk will keep you from getting a good night’s sleep.

If you are 35 years old and priorities are to pad your retirement fund or save more for your kids’ college, don’t allow anyone to take your eye off those prizes just because they tweeted an opinion or wrote a blog post that seems to run counter to your investment plan. Any time you see someone touting a fundamental new discovery that changes everything or a bold investment plan that will turn pennies into billions, beware the myriad hucksters out there trying to prove that fools and their money are soon parted.

Put their advice in perspective. Rarely has any great investment opportunity forced someone to act on it in one day.  Do your own fact checking. Quickly look them up online to make sure they are legitimate experts in their fields and have a track record of success.

Verify everything

Sometimes, a blogger may also have a financial stake in seeing that an investment does well. Most bloggers do the right thing and share information about a stock or fund because they want to help. They can be a valuable resource. But be sure to independently verify claims and never take advice at face value. There are many federal rules about this but do not assume that others follow them.

You should also bear in mind that even when the motives of the person whose tweet you just received are on the up and up, they may have different investment goals from yours or be at a different stage in reaching for them. More than likely, their time horizon will be shorter or longer than yours, and their perspective might warrant a different opinion about a stock or a fund than yours.

An easy way to minimize the confusion is to create a social network tailored to your interests and needs. The beauty of a site like Twitter is that you can create a feed populated only with information from individuals, news outlets and organizations you want to hear from. That means you can easily follow and communicate with bloggers and investing experts who have opinions similar to yours or are working toward similar financial goals.

“Social” security

Just remember, even when communicating with third parties you trust, there is still the possibility of information breaches and even fraud. When engaging in conversations online about any kind of financial exchange — investment strategy, stock trends, etc. — never divulge account numbers, PIN numbers, birth date and especially Social Security numbers.

Just as you would in your non-digital life, the best advice is simply to be mindful of others’ motivations. Sometimes people are offering sincere advice. Sometimes their primary motive is to enrich themselves. Sometimes it can be both. Even if someone has far more experience than you in the world of finance or investment, it doesn’t mean you should automatically believe what they say or follow their recommendations.

It’s still a “your money, your move” world. Social media can be a great tool, but ultimate responsibility is still yours.

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