Reflections on investing

The emergence of mirror investing, or copycat investing, appears to reflect the popularity of social networking and perhaps investors’ frustration with Wall Street’s lackluster performance. At least four companies now offer mirror investing.

In a mirror-investing model, instead of traders sharing stock tips, they share the results. Your account is linked to that of a trader who is dubbed a “model manager.” He/she might be a professional or a seasoned amateur trader. When the model manager makes a trade in his/her account, the trade is replicated in your account. This could be an easy way to latch on to genius or a good way to lose your shirt.

In a 3-month example that ended Aug. 7 from Covestor, which is involved in mirror investing, the best performance of a model manager was up 10.3 percent, which means that if your account was “mirrored” with that manager’s account, you would have gained that much, minus fees that range from 0.5 percent to 2.3 percent of the account assets. However, the worst performance during that same period was a loss of 31.2 percent, which means that you could have lost that much—and still owe the fees. The Standard & Poor’s 500 Index was down 5.2 percent during that same period.

That downside might become a vicious cycle: If the trader undergoes a period of underperformance, your investment might be at an increased risk, because the trader might increase the level of risk in his/her portfolio to make up the losses in a short period of time, warns Patrick W. Fisher of Schneider Downs Wealth Management Advisors.