U.S. regulators are warning investors about the risks of using social sentiment investing tools, which collect data on social media and news traffic, to guide their investing decisions.
In an alert, the U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) note that while some investors may find value in these tools, they should also be aware of the risks, including that they may provide information that is “inaccurate, incomplete or misleading.”
For instance, the data may be stale, and therefore less useful, or it could include social media posts that have a hidden agenda, such as manipulating stock prices.
Additionally, the alert warns that the data could prompt investors to make impulsive decisions, “which can be a risky way to approach investing.”
Among other things, the regulators warn investors not to rely solely on social sentiment tools.
The alert also recommends that investors consider disclosures and disclaimers that accompany social media data, that they know their time horizon, and that they track the performance of their investment decisions that use these tools to assess their predictive value.