Matt Krantz’s USAToday article, “Social media shapes new investment strategy,” reports on a new trend in investing that is both surprising and potentially harmful to investors who use it. The practice is called “mirrored investing” and it allows an investor to mirror the trading being done by another individual, essentially giving discretionary trading authority to a stranger.
Grabbing the coattails of someone who appears to be successful has some surface appeal, but also significant risks. The “hot hand” is almost inevitably a flash in the pan, any purported “track record” of beating the market may be misleading, and there could be outright fraud involved. A variation on “pump and dump” fraud could occur if, for example, the “hot hand” being followed has another undisclosed “shadow” account where he front-runs or trades ahead of the mirrored account, pocketing profits in the shadow account as the price is pumped up and then driven down by the followers in the mirrored account.
Firms offering mirrored accounts include Ditto Trade, TD Ameritrade (Autotrade), Folio Investing, and other non-brokerage firms like Wealthfront and Covestor.
“I’m a market idiot. Placing trades on my own is something I can’t do,” said one investor. Well, that is what mutual funds are for. Mutual funds have fees but so do mirrored accounts ? up to 2% of the portfolio value. That is a hefty fee to pay for having your assets in effect managed by a non-professional with no stated objective or benchmark and no oversight.
As Vanguard founder John Bogle once observed, this is just another example of the financial industry catering to and taking advantage of the worst instincts of investors.
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