Fighting for the Truth: Investor Misinformation

By Stephen J. Scott, CFP®

Within the past decade, the term “fake news” has entered into our lexicon. While most people associate the term with politics, the idea of misleading or misdirecting investors is nothing new. Investor misinformation has become even more of a risk because of the increased usage of social media and the plethora of targeted advertising.

The majority of individual investors do not have the time (or the desire) to perform proper due diligence when making investment decisions. For most of us, the idea of sitting in a recliner on a lovely summer evening with a company’s financial statement or SEC filings does not sound like a nice way to wind down after a day of work. Then how do we separate the news from the noise and misleading information?

Fortunately for investors, a few simple best practices can help you from falling victim and ultimately losing money.

• Always be skeptical. The majority of investment decisions today have some level of trust built into them. Trust is important, but no one is ever going to get every investment decision correct. If you hear a great investment idea from a friend, a new strategy from your advisor, or even an intriguing opportunity from an ad on the news or radio, take some time to do your own research. Verify that the information is accurate and that you do not hear a distorted version of the truth.

• Beware of investing fads. Fad investing has recently been on the rise with meme stocks (GameStop is the best example) or SPACs; even some cryptocurrencies would fall into this category. Fueled by fear of missing out (FOMO), investors have witnessed others make unbelievable gains from these investments, and many investors are claiming that their prices will continue to rise based on some far-reaching assumptions. Most of these investments are far too risky or even just pure speculation.

• Determine who benefits if you make this investment. When you hear about a great opportunity, you should always ask yourself why you are being informed. Does the person telling you have anything to gain if you invest? Investment commissions seem not to be as prevalent as in years past, but hidden and ongoing fees are still a drag on your investment gains. It is reasonable that professional advisors should be compensated for their work, but is what they are charging you reasonable? Where they are being compensated from can be equally as important because this factor could add some additional bias into their recommendation. Never be afraid to ask how people are paid for investment advice, or what they are due to gain if you participate.

• Evaluate the opposite side. Many professional investment teams ensure that the opposite side is always represented. Forcing yourself to play devil’s advocate can often uncover considerations that make the investment look unappealing and not worth taking the risk, while at the same time helping you evaluate in what scenarios the investment may do poorly.

• Understand how your brain works. This is one of the more challenging ideas to grasp, but it is important to realize how we perceive information when we don’t have all of the facts. Our minds are not computers; they can often misremember or distort the information we have heard. When combined with our pre-existing biases and beliefs, the result may be different from the truth. There is a chance we will hear what we want to hear, especially when what we hear is from someone most likely offering an appealing recommendation.

Misinformation and fake news are not going away anytime soon. Some of these tips and techniques to recognize misleading forms of information will hopefully help you make informed decisions about your investments.

Stephen J. Scott, CFP® graduated from The University of North Carolina at Greensboro in 2002 with a BS in Business Administration. He received a Masters in Business Administration from Quincy University in 2004. Scotty earned the CFP® designation in 2007 and began working for Abacus Planning Group in 2011. Scotty is one of seven Abacus shareholders.

Abacus

Abacus https://www.abacusplanninggroup.com/ is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.6 billion on behalf of its 250 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.