It’s fun to talk about stock picks with friends, and while tuning into social media can help expose you to some unique perspectives on a broad range of stocks or even the markets, it’s pretty easy to get drawn into following the crowd. Undoubtedly, following the herd can get investors into a lot of trouble, especially if they’re paying too much attention to some of the traders out there, many of whom are just looking to make a quick buck off the market action in any given week.
Indeed, independent thinking and acting as a contrarian can be far more rewarding than copying a popular investment idea that may be trending on your favourite social-media platform at any given time. Though I can’t speak for everyone, I do think that market newcomers and young beginning investors could get caught offside if their first source of information on financial markets is from social media.
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Following the herd could be a dangerous move
If you’re not sure how to navigate the market waters or gauge your own risk tolerance, going for the “hot” trade (it tends to be a momentum play) at any time may very well cause you to get into a risky investment that you’re not prepared for as volatility strikes. And if you’re dealt some downside instead of the upside you were hoping to get, it might not be too long before you hit the exit button, perhaps alongside the likes of many others who are ready to chase the next hot thing.
Personally, I think going down the passive route can make more sense for new investors. And if one does decide to pick stocks, I’d suggest ensuring proper diversification and having a backup plan if one’s best investment idea winds up heading south in a hurry. And while I’m not suggesting new investors check out of social media entirely, I would treat any exciting momentum plays with extra caution.
At the end of the day, it’s on the investor to put in their own due diligence. Those who follow others into hot stocks tend to be among the first to get out at perhaps the worst time. For those who want to trade, I’d argue that pairing a portfolio of individual stocks with a diversified ETF, like the Vanguard FTSE Canadian High Dividend Yield ETF (TSX: VDY), can make a lot of sense.
The diversified ETF sports a nice 3.8% dividend yield and has even less tech exposure than the broader TSX Index. As an ETF that’s heavier in the value-focused Canadian stocks, I suspect it can stay robust, even as tech’s correction worsens.
Dollar-cost averaging into steady blue chips could be the move
Whether we’re talking about trying to be a hero by buying the dip in the hard-hit software names, fallen cryptocurrencies, or buying strength in what’s working right now, I would be very cautious regarding names that are trending because odds are you’ll be taking on far more risk than you might think you can handle. For beginners, knowing your risk tolerance is a must.
The value rotation trade seems to be on the table right now. And while I wouldn’t completely turn away from tech, I would look to give some of the most established, steadier names a closer look. At this juncture, the big bank stocks look tempting.
