Outsourcing Your Investing Decisions
October 24, 2009
Would you pay someone to make your investment decisions for you? Sure, most of us have some money invested for us by mutual fund managers but would you outsource your investing choices to someone that simply had a good track record of earning in the stock market?
A company called kaChing that runs a virtual stock trading website has added the capability to allow you to automatically invest your money in the exact stocks that the best investors on the site have in their virtual portfolio.
Site members that have maintained a virtual stock portfolio for at least a year with positive returns are eligble to become what the site calls an investing “genius”. To qualify they have to get a certain score on an InvestmentIQ test and sign regulatory documents regarding securities laws.
Investing Your Money
KaChing’s philosophy is transparency you can see the holdings, trading history, and research of everyone on the site. You can also see what stocks they’re watching and a peformance analysis of their investing.
If you find an investor whom kaChing has qualified as having an acceptable track record & sufficient investing knowledge and you want to mirror the stock trades they make then you can sign up to do that with kaChing.
kaChing opens an brokerage account for you at Interactive Brokers and will use your money to perform the same buying and selling of stocks as the investor that you chose to follow. The investor you’re following will charge an management fee that ranges from 0.25 percent to 3 percent of each trade. KaChing keeps a quarter of the fee, and the investors get the rest.
A Different Investing System
The thought behind the kaChing system is that mutual funds charge fees that are too high and they are not transparent enough with how they’re investing your money. The founder, Dan Carroll, felt he could offer a better system and started kaChing to address some these concerns.
kaChing is attempting to let past performance help you find investors that you would feel comfortable “managing your money” for you. Of course they don’t directly manage it, they simply buy and sell their virtual holdings and you mimic them in the real world.
kaChing Investing
One thing that’s good to see is that at the top of each investor profile they indicate whether the investor has some of their own money invested in the funds so at least you can see if they have skin in the game. They also display how much money in customer assets is actually mirroring the trading moves of the investor.
Of course neither of these things will tell you if the person’s stock choosing ability will be successful and consistent. The way I see it, the big question is whether the qualifications kaChing requires are enough to make you feel comfotable investing your money with these investors.
I hate it that they call the qualified investors “geniuses”. It seems dangerous to me, both for the investor and the people matching their trading moves. You certainly don’t want the investor thinking they are a genius and feeling as though they can’t go wrong. You also don’t want people to put their faith in an investor simply because they’ve been labeled as an investing “genius”.
Something else to consider is that even if you did invest money through kaChing you’d have to watch the investing strategy of each investor and how it fit into your overall investment portfolio. For example, the investor with the top returns at the moment invests only in the healthcare industy. The intro to his nvestment strategy on the site is:
“My portfolio aims to produce returns from small to mid-cap companies in the biotechnology and pharmaceutical sector. I focus on discovering significantly undervalued companies with encouraging drugs and opportunities for significant gains.”
Would You Use kaChing to Invest Your Money?
I don’t think I’d setup my investments to be automatically made to mirror kaChing investors. It certainly wouldn’t hurt to open a virtual account and start following the moves of the top investors; picking their brains to see what moves they make and why. I’m sure you could learn a lot about the market and try out what you learn with your virtual account.
It is interesting how technology is being used to enable individuals to perform some of the functions that we’re used to depending on big financial businesses for. Companies like Prosper and Lending Club have created a whole new marketplace for peer to peer lending where individuals can lend money to others, cutting out the banks and the fees they charge.
Now kaChing is offering an alternative to having mutual fund companies manage investments for you. Instead you can choose to follow the investments of skilled individual investors. Who knows, maybe it’s the investment model of the future but right now it’s not for me.
All posts by Ben Edwards
I have only glanced a kaChing, which is why I don’t have a well founded opinion about this service yet. Still, I would like to add my two cents. Generally I don’t like any investing strategy that costs a lot of money. 3% management fee is way too high for my taste. However, I think that kaChing can serve one purpose for retail investors. You can take some of your investments, say 10% of all the money you have in equities – hopefully in low cost index funds, and invest it with one or more people on kaChing. This would get you some extra oomph if the people whom you chose perform well, while it would not jeopardize your investments if they all flopped.