The famous successful investors’ or institutional investors’ investment portfolio imitation could lead to significant losses.
The probability is high that in the struggle for survival in the financial markets every trader ever thought about how to replicate the successful trader’s or investor’s strategy and investment portfolio. Someone can just think about it, but someone seriously decides to follow the financial guru and his tactics. And here the problems may occur. Let’s take a closer look, which traps a trader can fall in, if he is trying to copy successful investors.
The difference between you and really successful traders
Problems with diversification
Typically, portfolios of both private and institutional investors with huge capital have a number of positions. This plurality is due to diversification: if in one industry the things go down, the assets in the other industries will not let losses grow. Thus, successful investors’ portfolios are diversified.
When a private investor is trying to get hold of the same basket, he simply does not have enough money to cover those industries, which are covered by the investor he follows.
Consequently, there is no way to imitate at full, and there is no way to diversify a portfolio as it was done by the role model.
In this situation, the trader may make up his mind to take a part of the guru’s portfolio and buy it, hoping that at least a piece of smash portfolio can give a good result. But in this partial imitation precisely lies the mistake: if to simulate prosperous investor’s portfolio in part, the simulation value is lost, since the given part of portfolio is not diversified. When the tools, purchased by simulator, begin losing value, the missing tools cannot compensate, and the portfolio’s apology
Even when a trader is able to diversify his own portfolio as the original one, another problem may occur – time. For traders and private investors the immediate result is necessary.
Even in case when a trader is willing to wait for a year or even a couple, then, according to long-term measures, two years are like “immediately” as it is not a problem to wait for 5 or even 10 years for institutional investors. It means that a prosperous investor, who has a long-term strategy can afford waiting for a decade until his well-selected portfolio brings crazy profits, while a private investor, cannot wait that long even if he picked up the same portfolio. Consequently, the copied portfolio is not gaining the intended value for the short period, and the purpose of the event is reduced to zero.
Lack of communications and human resource
Institutional investors, for example, funds, have a number of employees on the stab, monitoring the current situation in the market. These analytics have their fingers on the pulse of events, not only for companies but also for the whole industries. These analysts own the links and knowledge. And they have the time for keeping track of everything going on in the market all day long.
What does the private investor have in response? Suppose he possesses knowledge and skills, but it is very unlikely that he possesses all the necessary tools, connections and features, which a staff of analysts, as described above, owns. Therefore, when the market is going through some changes, a private investor is not able to adequately respond to it in time, unlike an institutional investor.
“The casino is always on velvet” – this saying either applies here. Prosperous investors, no matter if they are institutional or private, own the capital, communications and patience allowing to finally bring their portfolio to the intended result. As a usual thing, efforts of imitating the successful investor’s strategy and portfolio will not be lucky, because a private average investor does not have enough capital, time, knowledge or contacts helping to achieve the same brilliant result.
That’s all for now. Got any questions? Just ask the expert!