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Finfluencers, FOMO and AFSLs.

July 21, 2021

Investors are only human, humans have emotions and as we well know, emotions can be irrational.

We have seen some significant market gains with the S&P/ASX200 index rising 24 per cent over 2020-21 – its biggest gain since inception in 1992, the ATEC Index providing a 35.86% return (2020-21), and the DWCF rising 39.87%, during a period where many individuals have entered the investment markets for the first time.

There are widening gaps between market commentators’ confidence on the economy and global markets. For example Michael Burry of “The Big Short” fame, recently tweeted this pessimistic outlook “People always ask me what is going on in the markets, it is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360.”

On the flip side, the optimistic Professor Aswath Damodaran who teaches at NYU’s Stern School of Business recently made the call in an interview that “Market gurus take themselves too seriously” and was of the view that although the markets could be in a bubble, this could be true at any time. We see this in Australia and the US, where there has been a buoyancy in the market with people being optimistic about growth and the economy revitalised.

Whichever view is correct, following the COVID-19 pandemic, there has been a 10% increase in screen time and social media/internet usage in Australia and a doubling of retail market participation on the ASX. These conditions have created the concept of “FOMO investing”. This is a scenario where a constant stream of quick information builds fear of being left behind in a race with others who purport to have become exceptionally wealthy off speculative investments.

FOMO Investors are fuelled by finfluencers and celebrities that use social media with advice and tips on every asset class. The new wave of investors (who have not experienced the scare of a market crash) now source advice from platforms such as Reddit, YouTube, Twitter, TikTok, Instagram etc.

In a recent AFR article, the ASIC chairman Joe Longo said it was a “big subject” and an “area of big concern” for the agency. ASIC wants to keep informed of any social media influencers who might be straying into formal financial advice without a licence.

With all that said and humans being wired the way we are, Independent Trustees and Responsible Entities can play an integral role in building appropriate controls and integrity around investment processes. We help build robust processes and governance arrangements to assist investment managers mange the day to day risks of market valuations and fluctuations regardless of the investment strategy.

Fiduciary gatekeepers should be focused on what is in the best interest of investors, through evaluating risks, governance structures, pricing/ valuation framework and regulatory compliance which can be overlooked in the sprint to build wealth.

We may not be able to predict the market but a sound foundation of governance will provide significant assistance through volatility.

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