Stock investment advice – Don’t be a copycat investor

Everyone has his own style of investing in stock market. Some investors do their own research to make sure that the stock they are buying is worth their investment or not. But there is a huge population of investors who don’t want to research stocks for various reasons. They think that if they can copy the portfolio of a large successful investor, they would be able to make similar kind of money. Instead of taking just the stock investment advice, they want to emulate their portfolio which can be disastrous for them.

While taking stock investment tips is not a bad idea, no-one should try to copy the portfolio of another investor. Everyone would like to earn like Warren Buffet of Berkshire Hathaway or any other successful mutual fund but copying their portfolio is not the right step in that direction. Let us look at a few reasons in detail to justify this point:

Retail investors cannot diversify as institutional investors – Usually an institutional investor portfolio has more than a 100 different stocks. This is because these investors like to spread the risk into various sectors, industries or even international countries. This diversification of funds helps them reduce the risk of dependency on one stock, sector or index. Since retail investor ends up investing in top few stocks in that portfolio. This strategy doesn’t provide him with the risk mitigation which large institutions get. Therefore, the inability of a retail investor to imitate the diversification of a mutual fund is the main reason why they are not able to outperform the market like these mutual funds.

Investing horizons may be different – No two investors have the same risk appetite and investment horizons. While large institutions are in the market for longer term, the retail investors may not be.

Institutions don’t disclose their transactions early enough – This is one of the major reasons why retail investors should not copy institutions. Most mutual funds disclose their portfolio only once a quarter. A quarter is a long time difference since a lot can happen during this period. By the time retail investors come to know about the updated portfolio, the reason for buying or selling a particular stock has expired. You are not able to time the market in a better way.

Institutions have money and ability to research – Since these institutional investors have huge amounts of money to spend and lot of qualified analysts on their payrolls they can make informed decisions. They are able to buy research reports and market analysis reports directly from other agencies. This always gives the institutions an upper hand.

Trading costs – Since the institutions are wealthy, they are not very much bothered about the trading costs. But a retail investor cannot trade frequently enough since the trading costs and commissions will eat into his profits.

Conclusion - Bottom line is that retail investors should stick to the strategies suitable for their risk appetite and investment horizon. It is not a good stock investment advice to mimic a portfolio of a large investor since it may not have the money or research capability to copy that.

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