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Should You Invest with the Random Guy Down the Street?

April 11, 2010 Leave a comment

Apparently the new thing is for people to invest with miscellaneous investors who have generated some good returns:

Who needs a stock broker or mutual fund when you can take on the big shots at their own game? A growing number of investors are casting their lot not with Wall Street’s giants but with the small-time stock pickers on Main Street.

Covestor.com, the site that Mr. Risch uses, has grown from a handful of registered users to more than 27,000 since it launched in 2007. Another upstart, kaChing.com, says it has attracted more than $6 million from clients who follow its “geniuses”—seasoned pros plus a handful of individual investors who have racked up exceptional records verified by the site. Those individuals include a former chemist, a health-care industry worker and a college student who caught the investing bug after watching the Oliver Stone movie Wall Street (and who is up more than threefold in the past year).

The assumption seems to be that these individual investors have some insight into the market that professional market players don’t. Admittedly, a lot of the advice proffered by self-described market pros isn’t worth the energy they expend propounding on the markets, but it doesn’t follow that following the random investment ideas of small investors will yield better returns over time. In any event, these services are a rather expensive proposition:

Fees for most managers on Covestor average $98 a year for each $10,000 invested, but managers charge up to 2.3% for the more actively traded portfolios. That doesn’t include trading commissions that clients pay separately. KaChing’s fees average 1.25% before commissions, and it has some managers who charge more than 2%. That compares with the fund industry’s average expenses of 1.4% for actively managed domestic stock funds. KaChing CEO Andy Rachleff says the fees aren’t high when you factor in other expenses, such as marketing fees and sales charges that can jack up the costs of mutual funds. Covestor CEO Perry Blacher adds, “There are no hidden fees, no middlemen, no Wall Street conflicts of interest.”

It seems to me that the standard advice of a broadly diversified portfolio of low-cost index funds is what most small investors should choose. Boring, but (relatively) safe.