A growing number of UK investors are turning to 'copy trading', a method allowing them to automatically replicate the investment portfolios and trades of other users on various online platforms. This trend, facilitated by platforms such as eToro and Trading 212, appears to offer an accessible entry point for those new to investing, by seemingly leveraging the expertise of more experienced individuals. However, financial experts are increasingly cautioning that this approach, far from being a simple strategy for beginners, can expose investors to heightened and often unforeseen risks.
Copy trading platforms operate in different ways. eToro's 'CopyTrader' service, for instance, allows users to directly mirror the trades of 'popular investors', with changes to the copied portfolio happening automatically. These popular investors may also receive commissions based on the number of people copying them. In contrast, Trading 212 offers 'social pies', where users share themed portfolios. While users can replicate these pies, changes made by the original creator require manual acceptance, classifying it as social trading rather than direct copy trading. These platforms often provide profiles of the individuals or pies available to copy, which can influence a beginner's choice.
Despite its appeal, research suggests that the option to directly copy others' investments can significantly increase risk-taking behaviour among retail investors. A 2020 experiment highlighted that providing information on others' success and the ability to copy them directly led to a notable rise in risk exposure. A key concern is that the individuals being copied are typically not professional financial advisers, meaning their investment decisions are just as susceptible to common amateur mistakes. Bige Kahraman, an associate professor of finance at the Saïd Business School in the University of Oxford, points out that retail investors often 'realise gains too soon, but if it's a losing stock, they hold onto it too long, and this means they underperform'. Copying such behaviour can lead to collective underperformance, increased tax liabilities, and higher overall costs for those mirroring these strategies.
Furthermore, some copy trading services, notably eToro's CopyTrader, include access to highly speculative and volatile products such as cryptocurrencies and Contracts for Difference (CFDs). These investments are not permitted within a tax-efficient Individual Savings Account (ISA) wrapper due to their high-risk nature. The Financial Conduct Authority (FCA) has issued strong warnings regarding these products, stating that 'Crypto and CFDs are complex, high-risk products and consumers should understand that they may lose the money they invest in them.' The regulator further mandates that firms offering these services must ensure customers clearly comprehend the associated risks before trading, and take additional steps to assess suitability when customers are copying another's strategy, aligning with their Consumer Duty requirements.
For UK households and businesses, the implications of engaging in copy trading without a full understanding of the risks are significant. While the allure of potentially higher returns by mimicking seemingly successful investors is strong, the reality can be increased financial exposure and potential losses. This is particularly pertinent in a volatile economic climate, where the Bank of England's interest rate decisions and broader market fluctuations already present challenges for savers and investors. The FTSE 100, while not directly impacted by individual copy trading decisions, reflects the broader market sentiment and economic health that can influence the performance of underlying assets within copied portfolios. Savers seeking stable returns and mortgage holders managing their finances need to be especially cautious about strategies that could amplify risk unnecessarily.