4 Myths about Personal Finance on TikTok

4 Myths about Personal Finance on TikTok

TikTok has emerged as one of the most popular social media networks in the world with more than 800 million users. Since the majority of these users are teenagers and young adults, TikTok may appear to be the perfect platform to promote financial literacy. Most people think of TikTok as a forum to watch people dance, do impersonations, or show off random moments in their lives. However, personal finance influencers have also begun to pop up on TikTok to offer their advice. Certainly, many of these people have good intentions when they post videos and offer advice. At the same time, a number of myths have gone viral on TikTok, which can prove dangerous for young people who are not yet financially literate.

When reviewing personal finance advice on TikTok, it is important to research anything that is said rather than to take it at face value. Accepting advice without questioning it can lead to poor financial decisions. The following are some myths that have been perpetuated on TikTok by personal finance gurus:

1. Shorting the stock market is easy and lucrative.

Hedge fund billionaire Bill Ackman has a viral TikTok in which he uses a coin-based metaphor to explain how to short the stock market. While this is a viable option for investors, the video does not go into the incredible risk involved with this strategy. Moreover, the metaphor is not entirely clear about how people can successfully short. Short selling involves betting that the price of a particular stock or asset is going to decrease. Typically, this strategy is reserved for experienced investors who understand the risks. Even people with a lot of experience can end up losing a lot of money when they attempt to short the market. The idea that shorting the market is easy can cause young investors to be much riskier with their money than they should be.

2. You should try to minimize your mortgage down payment.

Another viral TikTok encourages people to put down as little money as possible on their mortgage. The problem with this video is that the poster then encourages people to use the rest of the money that they would have spent on a down payment to invest in a product that directly benefits him. The real issue is that there is no one right way to approach a mortgage, and the best strategy largely depends on your personal circumstances, including the type of loans you qualify for and your future financial goals. Buying a home involves a conventional 20 percent down payment. However, this is not realistic for everyone, and not having this money should not be a deterrent. When considering whether to purchase a home, you should talk to a professional to see what strategy works best for you. In the end, they may recommend a minimal down payment, but not necessarily.

3. You should copy the investments of the wealthy in order to build wealth.

One TikTok user increased the value of his investments by 16 percent in two weeks by copying the investments made by CEOs. The SEC makes several forms available to the public on its website. Form 4s record when people who own more than 10 percent of the stock of a company buy or sell shares. 13F forms disclose the holdings of institutional investor managers with at least $100 million in assets each quarter. Schedule 13D forms get filed whenever someone acquires 5 percent or more of the shares of a company. While you can follow these moves, the forms all have a lag, so you may be missing out on any potential opportunities. Moreover, these forms do not tell you why a certain trade was made.

4. If you start investing at 18, you will retire with nearly $2 million.

Another TikTok video encourages 18-year-olds to start investing $300 million each month in the stock market. The video claims that if people do so for eight years, they will retire with $1.8 million. In reality, taking advantage of compounding interest is a great investment strategy, and this advice is solid. The problem with this advice is that it makes promises that may not hold true. No guarantee exists that you’ll end up with a certain amount of money due to market fluctuations, not to mention inflation, fees, and taxes. This strategy also exposes you to sequence risk, which is the possibility that the market could have a downturn right as you’re about to retire. This sudden downturn could significantly reduce the value of your account. While investing early is important, it is also critical to set realistic expectations.