The problem with investing like everyone else on social media

It’s fun to talk about stock picks with friends, and while tuning into social media can help you discover unique perspectives on a wide range of stocks or even the markets, it’s quite easy to get sucked into following the crowd. Undoubtedly, following the herd can get investors into a lot of trouble, especially if they pay too much attention to a few traders, many of whom just want to make a quick buck from the market action in a given week.

Independent thinking and contrarian trading can be much more rewarding than copying a popular investment idea that may be trending on your favorite social media platform at any given time. While I can’t speak for everyone, I do think that new entrants to the market and young novice investors may be left out if their first source of information about the financial markets comes from social media.

Following the herd can be a dangerous move

If you’re not sure how to navigate the market or assess your own risk tolerance, choosing the “hot” trade (it’s usually a momentum play) at any time could lead to you getting into a risky investment that you won’t be prepared for when volatility hits. And if you end up at a disadvantage instead of the advantage you were hoping to get, it may not be long before you hit the exit button, perhaps like many others who are ready to pursue the next exciting thing.

Personally, I think it may make more sense for new investors to take the passive route. And if one does decide to pick stocks, I recommend ensuring proper diversification and having a backup plan in case someone’s best investment idea goes hastily south. And while I wouldn’t suggest that new investors abandon social media completely, I would treat any exciting momentum play with extra caution.

Ultimately, it is up to the investor to conduct their own due diligence. Those who follow others in hot stocks are often among the first to get out at perhaps the worst time. For those looking to trade, I would say that pairing a portfolio of individual stocks with a diversified ETF, such as the Vanguard FTSE Canadian High Dividend Yield ETF (TSX:VDY), could make a lot of sense.

The diversified ETF has a nice dividend yield of 3.8% and even has less exposure to technology than the broader TSX Index. As an ETF that is more heavily weighted in value-oriented Canadian stocks, I suspect it can remain robust even if the tech correction worsens.

Dollar cost averaging to stable blue chips could be a good move

Whether we’re talking about trying to be a hero by buying the dip in hard-hit software names, fallen cryptocurrencies, or buying strength in what’s working now, I would be very careful with names that are trending because chances are you’re taking on a lot more risk than you think you can handle. For beginners, knowing your risk tolerance is a must.

Value rotation trading appears to be on the table at the moment. And while I wouldn’t turn away from technology completely, I would try to take a closer look at some of the most established, stable names. Right now, big bank stocks look tempting.