Let's explore why Copy trading may not be the most suitable option for you and explore alternative investment options worth considering.
At Chump Profit, we often get asked about the best copy trading platform, and our answer may surprise you. We believe that copy trading is a con, designed by platforms to entice individuals to invest their money, giving them false hopes of making it big in the finance markets. We urge you to keep a close eye on the traders, especially on platforms like eToro, and observe their returns and how long they remain on these sites - you'll be astonished. In conclusion, it is better to trade and learn on your own or let a professional handle your investments.
Don't take our word for it, check out these stats.
Further more a series of research studies, including those conducted by MIT and even Etoro, have revealed concerning findings about the risks and pitfalls associated with this practice. While some studies have shown improved performance for guided copying and positive returns for copied trades, others have highlighted lower returns, the disposition effect, and the potential for excessive risk-taking among copy traders. These studies emphasise the need for severe caution and critical evaluation when engaging in copy trading, shedding light on the illusion of easy profits and the potential adverse effects that investors should be aware of.
Recent studies by Apesteguia et al. (2020) and Doering et al. (2015) again highlighted the potential risks and drawbacks associated with copy trading. These studies discuss issues such as lower returns on copied trades compared to regular trades, the influence of social trading networks on risk-taking behaviour, and the need for caution when engaging in this strategy. The UK Financial Conduct Authority has also provided insights into copy trading, emphasising the importance of understanding the potential risks involved.
Why did it become so popular?
Copy trading has gained significant popularity in recent years as a seemingly simple solution for individuals looking to profit from financial markets without extensive knowledge or experience. However, beneath the surface, there are several compelling reasons why copy trading may not be the best choice for individual investors seeking long-term success. In this blog, we will explore the pitfalls of copy trading and shed light on why it may not be worth it.
1. Lack of Control and Autonomy:
One of the fundamental downsides of copy trading is the relinquishment of control and autonomy over your investment decisions. By copying the trades of others, you are essentially placing your financial fate in the hands of someone else. This lack of control can be detrimental, as you become reliant on the skills, judgment, and even emotional biases of the trader you're copying. It's important to remember that no one cares about your money as much as you do, and blindly following others can lead to unfavourable outcomes.
2. Risk of Incomplete Information:
Copy trading often involves replicating the trades of successful investors or trading algorithms. However, the information available to you as a copy trader is often limited and may not include critical details about the rationale behind those trades. Without a deep understanding of the underlying analysis, market conditions, or risk management strategies, you are essentially investing in the dark. This lack of transparency can expose you to unforeseen risks and potential losses.
3. Potential for Herd Mentality:
Copy trading platforms often showcase the most successful traders or those with the highest returns. This can create a psychological pressure to follow the herd and replicate popular trades, regardless of your own investment goals or risk tolerance. The fear of missing out (FOMO) can cloud judgment and lead to impulsive decisions. Remember, successful investing requires a disciplined, long-term approach based on thorough research and analysis, rather than chasing short-term gains.
4. Hidden Costs and Fees:
While copy trading platforms may advertise low or no fees for copying trades, there can be hidden costs involved. Some platforms charge a percentage of profits earned, while others have wider spreads or higher execution costs for copied trades. These additional expenses can significantly eat into your returns and may not be immediately apparent when signing up for a copy trading service. It's crucial to thoroughly understand the fee structure before committing your funds.
5. Lack of Personal Development:
Investing is a skill that can be honed and developed over time. By engaging in copy trading, you miss out on the opportunity to learn and grow as an investor. Successful investing requires understanding market dynamics, conducting research, and making informed decisions based on your unique financial goals. By solely relying on copy trading, you deny yourself the chance to gain valuable knowledge and experience that can serve you well in the long run.
6. Disconnected from Market Shaping Events:
Copy trading is an automated trading method that often fails to respond to offshore or market risks. Major events such as geopolitical conflicts, changes in securities laws, or significant news that could impact investment performance are not adequately considered in the copy trading process. As a result, investors may be left exposed to unforeseen risks and market downturns.
7. Limited Track Record Evaluation:
Copy trading platforms may present impressive returns of individual traders or portfolios, but evaluating their long-term track record and consistency is essential. Research has shown that the majority of copy traders experience negative returns, with only a small percentage consistently performing well over time. Many traders with initially impressive returns eventually fade away, leaving their followers in a precarious position.
There are several successful options for individuals seeking alternatives to copy trading. Here are a few:
1. Self-Directed Trading:
Taking a self-directed approach to trading involves learning about financial markets, developing investment strategies, and executing trades on your own. This option requires a commitment to continuous learning, staying updated on market trends, and conducting thorough research before making investment decisions. By actively managing your investments, you have greater control, can tailor your strategy to your risk tolerance and financial goals, and have the opportunity to develop your skills as an investor.
2. Diversified Portfolio:
Building a diversified investment portfolio is a time-tested strategy for long-term success. Rather than relying on the performance of a single trader or asset, diversification involves spreading investments across different asset classes, sectors, and geographic regions. This approach helps mitigate risk by reducing the impact of any one investment's poor performance. By diversifying, you can potentially capture opportunities in multiple areas and achieve more consistent returns over time.
3. Index Funds and Exchange-Traded Funds (ETFs):
Index funds and ETFs are investment vehicles that offer broad market exposure by tracking a specific index, such as the S&P 500. These funds provide diversification by investing in a basket of securities that make up the index they track. Index funds and ETFs are popular among long-term investors because they offer low costs, passively managed portfolios, and the potential for steady returns over time. They can be a suitable option for those seeking a hands-off approach to investing while still participating in the market's overall growth.
Robo-advisors are digital platforms that provide automated investment management services. These platforms use algorithms to create and manage investment portfolios based on an individual's risk tolerance, financial goals, and time horizon. Robo-advisors offer the benefits of professional investment management at a lower cost compared to traditional financial advisors. They can be a good option for those who want a hands-off approach and prefer a technology-driven solution.
5. Seeking Professional Financial Advice:
Working with a qualified financial advisor or wealth manager can provide personalized investment advice tailored to your specific needs and goals. A professional can help assess your risk tolerance, design a comprehensive investment strategy, and monitor your portfolio regularly. They have the expertise and experience to navigate complex financial markets and can provide guidance during market downturns or economic uncertainties. A financial advisor can also provide holistic financial planning services, including retirement planning, tax optimisation, and estate planning.
Based on our experience and the statistics mentioned above, it is clear that copy trading is not a reliable or sustainable approach to achieve long-term financial success. The lack of control, incomplete information, potential for herd mentality, hidden costs, limited personal development, and disconnect from market shaping events make it a risky endeavour. Instead, we recommend either trading and learning independently or seeking the guidance of a professional who can provide personalised investment advice tailored to your specific goals and risk tolerance. When it comes to your hard-earned money, it's crucial to make informed decisions and prioritise your own financial education.
Remember, it's essential to thoroughly research and understand any investment option before committing your funds. Each approach has its own advantages and considerations, and what works best for one person may not be suitable for another. Assess your risk tolerance, financial goals, and time commitment to make an informed decision about the investment strategy that aligns with your needs.
* Bloomberg. (Retrieved from https://www.bloomberg.com)
Thomson Reuters. (Retrieved from https://www.thomsonreuters.com)
FactSet. (Retrieved from https://www.factset.com)