Some people attempt to simplify their investing journey by following in a successful investor’s footsteps. Copying the moves of well-known, high-performing investors is called copycat investing or copy trading.
Is this a good idea for you? Understand what it means and its possible advantages and disadvantages below.
What is copycat investing?
Copycat investing is when you mimic the investing strategies, ideas, and decisions of famous investors or investment managers.
These “model” investors have demonstrated years of experience and better-than-average results, so their choices may seem like a safe bet. The idea is that if they are making money, doing what they do might lead you to profit too.
Copycat investors may choose to follow just 1 or a handful of personalities. They use public information like company disclosures, news reports, interviews, and even social media posts to find out what well-known investors are buying or selling.
Pros and cons of copycat investing
Investing can feel overwhelming and time-consuming given the amount of information you’ll need to digest. Copying an expert who has already done all the work might seem like a good way to start.
However, it’s important to remember that success isn’t guaranteed. Here are the pros and cons to keep in mind:
Pro: You may benefit from expert insights
Following someone successful can give you more confidence especially if you’re new to investing. Knowing that you’re making the same choices as a top investor might help you feel good about your decisions.
Pro: No need to start from scratch
If you don’t have the time or expertise to pick investments on your own, copycat investing might seem like a shortcut to building a strong portfolio.
Con: Even experts make mistakes
Investment markets can be unpredictable and so even the best investors don’t always get it right. Following them blindly might lead you to losses if their decisions turn out to be ill-informed.
Con: Their investing style might not match yours
Someone else’s investing approach might not match your risk tolerance, time horizon, or financial goals. For example, your model investor may be OK with a level of risk that is beyond your own comfort level.
If you don’t understand why a particular investment is good, you might put in money without fully knowing the risks involved. This can prompt you to sell at a loss if things don’t go the way you hoped.
Costs are another thing to consider. It might take a lot of money to buy what big, well-established investors and investment managers are buying, even if you’ll invest at a smaller scale.
Con: The time delay may lead to different results
After a famous investor makes a significant move to buy or sell an asset, it can take time for that information to reach the public. That is, if it’s made public at all.
Things may have changed by the time you’re able to replicate that move. You might not get the same results as the investor you’re copying because of the time delay.
The time gap also means copycat investing may be a better fit for long-term investors instead of active traders who aim to buy and sell quickly.
Should you practice copycat investing?
Taking inspiration from successful investors can be helpful when you’re just getting started. The key is to learn from experts while also making your own decisions and understanding what you’ll invest in.
While shortcuts can be tempting, remember that the best way to achieve goals is to find a strategy that can work for you, tweak it according to your situation, and follow it consistently.
