Should you imitate your star investors portfolio?

The success of a star fund manager or an individual investor normally attracts a lot of followers who want to imitate them and ride on the coattails of these investors. Many investors follow this strategy on the expectation that their portfolio will also give similar returns. According to one of the studies done in the US market, a hypothetical portfolio that invested in Berkshire Hathaway’s investments a month after they were publicly disclosed would have outperformed the S&P 500 by an annual average of 10.75 per cent from 1976 to 2006. Against this, there are also studies that suggest otherwise. This may be since either fund manager has lost his Midas touch or there is some lag in implementation and execution of mirroring the investment.

Therefore, when you are mirroring someone’s investment you should keep the following points in mind.

Whom should you follow?
One of the most obvious reasons you will start mirroring someone’s investment is because of their performance. The duration, however, needs to be checked. You should go for those fund managers or star investors who are consistent with their performance.The next point that needs to be noted is the churning of investment. It is wise to follow someone who believes in buy and hold strategy. As it will be difficult to follow someone who frequently buys and sells his position.

Which stocks to buy?
A true imitation would be to invest in all the stocks a fund has invested in. Nevertheless, due to various reasons such as availability of fund you may not invest in all the stocks. Therefore, you should wisely select the stocks that give you good diversification and also cover the maximum holdings of the fund.

Best way to follow the star
Follow someone who has proved his mettle. This means follow funds or investors who have remained consistent in all market phases.Do not rush to invest in stocks that the fund has entered, but the prices have moved up since then. Wait for the right price or it’s better to skip that investment. Consider all the costs such as commission, holding cost and taxation before executing your strategy. It might turn out that it is better to buy funds rather than mimic them.Last but not the least, do not forget to do your own research on the stocks. It’s not necessary that all the stocks invested by a fund or star investor will outperform every time.