Should you take financial advice from Reddit? | Business | Economy and finance news from a German perspective | DW | 02.02.2021

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Business

Should you take financial advice from Reddit?

Reddit has taken center stage after its users organized to game the stock market. But is taking financial advice from strangers online actually a good idea?

The Reddit Logo on a mobile phone home screen

The so-called Reddit crowd has upset financial markets for a few days, but will the "rebellion" last for longer?

A reckoning could be in store for a lively sub-section of Reddit that had gone largely unnoticed until users made GameStop share prices balloon, then crash.

By Tuesday, the investing campaign organized by users of the social media platform Reddit started showing signs of fading. Silver futures fell 5% from an 8-year high and shares of the video game retailer GameStop fell nearly 50%. 

The price of the precious metal had spiked over 10% on Monday after it became the latest target of r/wallstreetbets. The online Reddit community — or subreddit — of hobby investors had previously banded together to buy up short-sold GameStop shares using the Robinhood trading app, deliberately driving up share prices and hurting hedge funds, before moving on to the supposedly undervalued silver. Some Reddit users have suggested a tip to buy silver was someone's attempt to game the markets, or that a hedge fund could have been behind the scheme.

While the markets try to course correct, will finance forums on Reddit follow suit?

Watch video 01:11

Reddit retail traders squeeze GameStop short-sellers

Ask us anything

The unprecedented actions of r/wallstreetbets users have drawn international attention to the forum, along with 5 million new subscribers in the last week. But Reddit boasts hundreds of other communities dedicated to the world of business and finance. As of Tuesday, over 70 related forums were listed on the platform's "Top Growing in Finance & Business."

Some communities are dedicated to long-term financial planning, like real estate investing, or the FI/RE (Financial Independence/Retire Early) movement and the related r/FIREd_and_Bored, a sub "for people who have retired early, or gained financial independence, and are bored."

Then there are those with a shorter-term, penny-pinching focus. Users of r/povertyfinance or r/almosthomeless seek advice on things like how to finance teeth replacements or what to do when you can no longer live in your car. Some post about their financial frustrations and others try to offer encouragement.

"These investment posts are everywhere, with people making thousands to millions of dollars," wrote one r/povertyfinance user this week. "I would do a lot for any of those people to take pity and just help me pay off my cars/house."

"I find it helps me to think of any little recent success," replied another. "Like I was able to pay my internet on time or I figured out how to pay off a ticket. It's not much but it helps me."

A group of demonstrators are gathered by the New York Stock Exchange building to protest Robinhood and bring their voices to Wall Street trades amid GameStop stock chaos in New York City

There's been a groundswell of support for the "Reddit rebellion" that some see as a battle between Main Street and Wall Street

The anti-Instagram

Unlike Twitter or Facebook, Reddit has stayed largely under the radar, especially since clamping down on the extremist content for which it used to be known. Over the last week, however, the platform has taken center stage.

"Reddit is online, but it mirrors the rest of the world. These are real people with real interests," says Christine Lagorio-Chafkin, senior writer at Inc.com and Inc. magazine. She is also the author of We Are the Nerds: The Birth and Tumultuous Life of Reddit, the Internet's Culture Laboratory. As for r/wallstreetbets: "Their interest happens to be in casual day trading."

Some of the brutal honesty you'll find on Reddit can be chalked up to the fact that everyone uses pseudonyms instead of their real identity, Lagorio-Chafkin told DW. 

"It allows people to discuss more openly private things like their relationships, their mental health, or their finances when they're not good," she says, and adds: "On places like Instagram or Facebook, people want to be this shiny, photoshop version of themselves. But on Reddit they discuss their real problems."

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All things finance

That would explain the interest in r/personalfinance, a forum dedicated to budgeting, saving, investing and the like, which has over 14 millions subscribers. Many smaller offshoots also exist, with content catering to different countries and regions.

For people in the EU, there is r/eupersonalfinance. Users ask for and offer advice on things like navigating financial hurdles when moving between EU member states. There are also forums for communities in France, Canada, India, the Philippines and elsewhere. 

More universal questions pop up repeatedly across forums: I've inherited money. What should I do with it? Is it better to use my savings to buy a house? Or should I invest it in the stock market? I'm getting married. Is it a good idea to share a bank account with my spouse? Some users share detailed breakdowns of their monthly spending, then ask the others where they see room for improvement.

The wisdom of the crowd

While it comes with its own set of risks, Christine Laudenbach says getting financial advice from strangers online can also be helpful.

"If I get a hundred responses to my post, one message tends to float to the top," something known as "the wisdom of the crowd" effect, Laudenbach, a professor of finance at the University of Bonn, told DW.

"There could be many people in a similar situation, who then write something about it, who have experience with it. And this exchange of experiences, I believe, is sometimes even better than going to a consultant," she says. "It has to do with diversification. If I go to one person, they might give me a bad tip. Here, however, I automatically get a very wide range of advice."

It's also useful for people who can't access financial advice within their social circle, perhaps because they are afraid to ask.

"It's also cultural," says Laudenbach, a specialist in behavioral economics and household finance. "In Germany, you don't talk about money. That might be what promotes the anonymity of these groups. These people are so candid there because they don't know with whom else they should discuss it."

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Finance goes viral

A growing number of Germans are looking to talk, however. The number of users in r/Finanzen, a forum founded in 2014 for finance buffs in German-speaking markets, doubled from 40,000 to 80,000 in the last eleven weeks. The source of the sudden growth is unclear, though it coincides with Bitcoin's ride to record highs. Numbers climbed even higher once the GameStop short squeeze began.   

Users of r/Finanzen and other finance subreddits have expressed frustration over the sudden growth of their communities.

"Going forward subs like r/wallstreetbets have permanently changed and I don't believe anything good is left in them with the influx of new people," a user of several English-language forums told DW. "I've been here for a few years and it seems no one just stays as a regular contributor. People just rotate each 5-6 months, where new people come and the people that came 6 months ago parrot what people told them."

The majority of people would be better off leaving their investments alone, says Laudenbach, adding that daytrading like we've seen in recent weeks isn't the best strategy for achieving stable finances

"That doesn't mean that it isn't fun," she says. "It's a very fine line. I think that many of the people that move in these forums know that they're playing with fire. It becomes dangerous when there is someone involved who doesn't realize that."

Chances are, though, that many will lose interest before they do too much harm.

"The lifespan of these things, you could consider it similar to the lifespan of a meme," Lagorio-Chafkin predicts. "It bubbles up, it goes viral, and then it's going to fade. People are going to get bored with it."

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