Copying investment portfolio of famous and successful investors or institutional investors can lead to the considerable losses.
There are very high chances that each trader, in the fight for a survival in the financial markets, ever thought of copying an investment portfolio and strategy of the successful trader or investor. Someone can simply think of it, but the other will make the decision to imitate the financial guru. There also can be problems. So, let's discover what traps could be on the way of “copy investor”.
As a rule, institutional investors and private investors with large capital have diverse positions in their portfolio. Such large numbers are caused by diversification: if one branch of business goes down, assets which grow in other branches will prevent losses. Thus, portfolios of successful investors are diversified.
When the private investor tries to obtain the same basket, he simply doesn't have so much money to cover all the branches covered at the copied investor. Therefore, there is no opportunity to imitate portfolio completely, there is no opportunity to diversify a portfolio as it was made by the example.
In such situation, the trader can come to the idea to take some part of a portfolio of the guru and to buy it, hoping that the part of a successful portfolio will yield good result. But in this situation can be met another trap: if the trader imitate a portfolio of the successful investor partially, the value of imitation vanishes because this part of a portfolio isn't diversified. And if tools which were bought by the simulator, start losing value, the missing not bought in addition tools won't be able to compensate, and the unfortunate portfolio will be doomed to a failure.
Lack of time
Even if the trader will manage to diversify the portfolio as in the original, there is another problem: time. Private investors and traders need result immediately. And even if the trader is ready to wait for a year or two, that, to long-term measures, 2 years — it's all the same “immediately” because for institutional investors — not a problem to wait 5 or 10 years. Turns out that the successful investor with long-term strategy is able to wait for ten years until its accurately selected portfolio makes mad profit, and the private investor, though picked up the same portfolio, can't wait so long. Therefore, the copied portfolio doesn't gain desired value for this short period, and the purpose of stocks is reduced to zero.
Lack of connections and human resources
Institutional investors, such as funds, have a number of employees who watch the current situation in the market permanently. These analysts have the finger on the pulse of events not only in the companies, but also in the purposes branches. These analysts have connections. There is knowledge. Also, there is a time for watching all events in the market for days on end.
What does the private investor have? Let his own knowledge and practical skills, but it is very improbable that he owns all those connections, tools and opportunities owned by the whole staff of analysts described above. Therefore, when there is some change in the market, the private investor won't be able to react to it adequately and on time as the institutional investor will be able.
“The casino always wins” — this statement is applicable and here. Successful investors, institutional or private, have a capital, connections, and patience to bring the portfolio to the desired result. As a rule, attempts to copy strategy and a portfolio of the successful investor won't be successful because the private investor won't have sufficient capital, time, connections or knowledge to achieve the same result.
Make your own strategy and have fun! Good luck!