“Hey Steve! I’ve been following your trades on eToro, and I can’t help but wonder why you’re making profits while I’m in the red.”
This article is specifically written for friends who are into copy trading on eToro. Most people find it challenging to make money in investments, and whether you’re copying on eToro or not, the real key lies in these four:
- Lack of Diversification.
- Imbalanced Allocation.
- Lack of Patience.
- Stop Learning.
1. Do you have diversification in your eToro portfolio?
For me, eToro is just a part of several investment platforms I use, not the whole deal.
Proper investing involves spreading the risk, allocating assets across different industries, countries, and platforms.
eToro is just one among many platforms. So, what you see on my eToro interface is only a small part of my assets, and it’s the high-volatility, high-return portion – mostly high-growth stocks and a bit of cryptocurrency, hence the significant fluctuations. Therefore, I wouldn’t recommend considering my eToro portfolio as the whole picture.
2. What percentage of your total assets does eToro copy trading represent?
Continuing from the previous topic, my investment portfolio on eToro constitutes only 5% of my total assets.
Despite its impressive returns, why just 5%? It’s because I’m aware of its significant volatility and relatively concentrated nature.
Here’s the crux: imagine if you allocated 30%, 50%, or even 100% of your assets to eToro copy trading. What would you do when my high-volatility portfolio experiences a 50% decline?
Indeed, it’s challenging to endure a 50% drop in your “total assets,” and if I were in your shoes, I’d find it equally difficult. Warren Buffett once said:
“If you can’t stomach 50% declines in your investment you will get the mediocre returns you deserve.”
So, it’s understandable that you might exit during a downturn, whereas I wouldn’t. Why? Because the investment portfolio you see on my eToro account represents only 5% of my total assets.
When it experiences a 50% decline, it translates to just 2.5% for me, allowing me to withstand a 50% drop in “stock prices.”
3. After copying someone on eToro, do you immediately exit when their performance takes a downturn?
Continuing from the previous discussion, when investment portfolios experience a decline, some eToro copy traders (hopefully not you) tend to panic and exit at a loss. In many cases, just as they exit, the stock prices bounce back, and those who exited end up re-entering at higher points.
This cycle repeats several times, leading to a situation where “I make 100%, and the copy trader loses 50%.” As Warren Buffett famously said:
“Buy and Hold; to be fearful when others are greedy and to be greedy only when others are fearful.”
These principles may sound simple but are challenging to execute. When others are rising, resist the urge to blindly enter the market; when others are falling, refrain from hastily exiting.
This has little to do with investment strategy or stock-picking skills and more to do with the strength of one’s mindset.
If you know your mental resilience isn’t that strong, consider implementing “percentage allocation” to diversify risks.
4. Does eToro’s copy trading mechanism hinder your learning?
When we choose to copy someone on eToro due to their impressive performance, it’s essential to trust their actions; after all, their success is likely grounded in reasons. However, if reliance on eToro’s copy trading mechanism leads to a halt in learning, gradually, it becomes challenging to distinguish between investors with good performance due to “luck” and those succeeding because they “adhere to correct principles.” As Warren Buffett puts it:
“Investing in yourself is the best thing you can do.”
Like Buffett, I spend a significant amount of time reading every day. Consequently, I don’t blindly follow 100% of Buffett’s investment insights. We differ by 50 years, have different backgrounds, skill sets, personalities, and varying degrees of familiarity with technology. Some things still need to be adapted to the present circumstances.
If you aim to learn entirely from someone, Charlie Munger might be a better role model.
Summary
Diversification, proper allocation, buy and hold, and investing in oneself are key elements of success. I hope you make profits not only on eToro by copying my trades but also through investments in yourself.
I have a blog in Taiwan where I share my principles, investment strategies, and case analyses. Feel free to read through AI translation and share it with friends around you who are interested in learning about investments.
My blog: https://stevelichoice.com/
