What is mirrored investing?

A new social media trend is changing the way some investors manage their portfolios. “Mirrored investing” is an online investment strategy through which investors “follow” and “attach to” other investors. When the “followed” investor makes a trade, the “attached” investor’s portfolio immediately “mirrors” the trade. All trades are adjusted to reflect the correct proportion of the trade in relation to account size.

Both brokerage firms and non-brokerage financial firms are beginning to offer “mirrored trading” to their clients. Advocates say it is an easy way for an investor who understands the importance of independent research and due diligence, but who doesn’t have the time or capability to conduct it him-or-herself, to ride the coattails of successful investors who do.

There are a significant number of potential problems with the strategy, however, as highlighted in a recent article on USAToday.com entitled “Social Media Shapes New Investment Strategy.”

First, the “followed” investor may have an investment strategy entirely unsuited for the goals and financial circumstances of the “attached” investor. For example, a 64-year-old near-retiree should not make the same trades as a 24-year-old whose primary goal is growth, no matter how successful the 24-year-old turns out to be. Second, there are a number of fees associated with mirrored investing, including per-transaction fees, which could really add up if the “followed” investor trades often.

Most importantly, however, is the potential for investment fraud. If a “followed” investor has a number of other investors “attached” to his/her portfolio, there is the potential for that person to artificially drive up the price of a particular stock. While firms may have safeguards in place to help protect against frauds of this sort, there is always the chance of misconduct when one person controls the investment decisions of another.

Understanding what “mirrored investing” is, and the risk factors associated with it, is vital in order to protect yourself from investment fraud. If you’re considering participating in the new online trend, make sure you do your research first.