April Fool’s Day is about jokes and pranks – or more specifically, trying not to fall foul of one. The financial world has a long and inglorious history of hoaxes, scams and tricks that tend to have painful consequences, however.
Back in 2013 investors lost money when a fake April Fool’s Day tweet about explosions at the White House caused an instant stock market plunge. More recently, Volkswagen of America revealed at the end of March 2021 that it was changing its name to ‘Voltswagen’, in what turned out to be an April Fool’s joke that happened to see its share price rise. The gag backfired badly, with the US Securities and Exchange Commission launching an inquiry to determine if it had broken corporate laws.
Unfortunately, ordinary savers and investors can too easily pay a hefty price for jokes, rumours and financial fictions that are anything but a laughing matter. So, here are five pitfalls to look out for on April Fool’s Day and beyond.
Falling for a good story, pt 1
April Fool’s jokes can be convincing. Investors have frequently paid the price for taking what they read at face value, without questioning it or conducting their own research. In 2015, for instance, investors piled into the shares of food and beverage SodaStream on the back of a fake April Fool’s Day story about it being bought by PepsiCo. SodaStream shares duly soared – only to drop quickly on the story was revealed to be fictional, leaving investors out of pocket.
The moral of this particular story? Do your research, speak to your adviser (if you have one) and try to stick to reputable news sources. This might mean identifying your most trusted sources, critically evaluating what you read and hear and fact-checking what you see before acting on it.
Falling for a good story, pt 2
Savers and investors already have to be on their toes for the many ways in which fraudsters target potential victims. Sometimes it’s not even subtle – spend long enough on certain social media sites and you’ll soon come across a celebrity of some sort flogging an investment or a cryptocurrency scheme that promises eyecatching returns.
But while investment returns in the double digits may be very attractive and tempting, they’re also unrealistic. If you’re offered returns that sound unusually high, the alarm bells should ring. Remember – if it sounds too good to be true, it probably is. Be sure to know the latest investment scams you should be watching out for.
Letting your heart rule your head
Investment guru Benjamin Graham once wrote that “the investor’s chief problem – and even his worst enemy – is likely to be himself”. He was referring primarily to our tendency to let our emotions take control of our decision making and sabotage our best laid plans. Perhaps the most obvious example is selling investments in a panic when markets fall, even when you have a long-term investment horizon.
But emotions such as fear, anxiety, excitement and greed can get in the way of successful investing in myriad ways, underpinning the behavioural biases that cloud our decision making and lead to poor outcomes. We have more on behavioural biases and how to overcome them when investing.
Getting too big for your boots
One particularly prominent investment bias is overconfidence. An inflated view of their skills and knowledge can lead investors to take too much risk, especially if they’re self-directed. Research suggests many DIY investors have a misplaced level of confidence. A 2021 BritainThinks study for the Financial Conduct Authority found “a striking lack of awareness and/or genuine belief in the risk of investing” among DIY investors, with 45% not seeing “losing some money” as a potential risk of investing, despite disclaimer warnings. Our look at the five simple rules for investing is a good place to start.
Acting the greater fool
This is literal, referring to the theory that prices go up when people are able to sell overpriced investments to a greater fool. This is based on the view that rather than being based on underlying and economic fundamentals, asset price movements are often driven only by hype and speculation.
Stock market history is littered with examples of companies being hyped up to a degree that bears no relation to their actual value, because there have always been greater fools to buy into the hype. Perhaps the most topical example is cryptocurrencies, in which prices rise and fall dramatically because of how people feel about its potential rather than any intrinsic value. So, don’t be fooled into investing your money in the latest hype – following the herd is rarely a good long-term strategy.
By using our free and easy-to-use comparison tools, you can be sure to make informed decisions about how best to invest your money and steer away from financial foolishness with our wide range of investment guides and articles that will help keep you on the right track.
