PostHeaderIcon The Problem With Imitating Institutional Investor Movement

shutterstock_188334569Many people would want to succeed in the field of investing. They try to make use of different approaches in order to get the most gains from their investments. While some investors use a personal approach to investing, others try to take the easy route. Some prefer trying to mimic how institutional investors do it.

Institutional investors such as mutual funds and larger investment companies all try to take advantage of the information they get and the experience offered by their financial experts in order to make the best gains on investment. Some smaller investors try to take advantage in the same manner through copycat investing. Some investors try to copy how successful institutional investors build up their portfolio. They buy the same stocks that successful mutual fund managers include into their portfolio.

From one perspective, copycat investing may look like a rational method of building an investment portfolio. But is it always a good idea? Here are certain pitfalls that copycat investing may have for the ordinary investor.

Different Aims

One of the problems with copying institutional investors is the difference in investment perspectives. Many institutional investors build up their portfolio in the long term. Some small investors do, too. But the difference how investors define “long term” can mean a lot. For most institutional investors, long term means investing with years or even decades of holding on to an investment. But for some small investors, long term can sometimes mean a period from 6 to 24 months. By that time, some investors may already be expecting the gains. The difference in mindset can mean a lot between profit and loss.

Difference In Costs And Treatment

In the same market, the ordinary and the institutional investor are treated differently. For the retail investor, costs for trading may be a bit higher as compared to institutionalized investor, who may engage in larger movements and more often. For the ordinary investor trying to copy such an investment strategy may end up costing differently. And one other thing, institutional investors are treated differently based on the large volume of shares they usually purchase. Most institutional investors enjoy favorable entry and exit points as compared to retail investors.

Level Of Investing Information

Institutional investors also get to obtain more information about companies and shares than ordinary investors. They have the luxury of obtaining advice from experts that may give them the upper hand on their investment decisions. Retail investors may not have the same luxury. They might only blindly copy the investment choices of the institutional investor without fully knowing the reasons behind each move. In this case, copycat investing can sometimes backfire on them instead of enjoying the benefits.


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