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Should You Take a Social Networking Approach to Investing?

Kate Stalter

Even before social media, investors liked getting a peek at where others were putting their money. In the 1990s, online forums and chat rooms gave retail investors a way to exchange ideas.

In 1999, a now-defunct company called MetaMarkets launched three mutual funds. The firm put cameras in the trading room and opened live discussion boards. Trades were posted for members to see, and fund investors could chat with one another and with fund managers. Chat-room ideas sometimes became fund components.

A few similar companies came and went, and MetaMarkets closed its funds in 2001. But the idea that do-it-yourself investors could beat professional managers -- or at least track them -- lived on. Today, numerous websites and applications allow individual investors to share trade ideas or try their hand at actively managing a portfolio in full view of other users.

Bob Lang, a former pension and 401(k) plan manager, now runs Explosive Options, a Simi Valley, California, firm he founded in 2011. The membership site provides options-trading education and lets users share trade ideas and watch real-time trades. Lang, who is transparent about the success rates of his trade ideas, says people need to do some homework before emulating a particular "guru" or strategy.

"There's always danger involved with information sharing," Lang says. "You don't want to be getting your investing ideas from just anybody on the Internet. You'll get lucky once in a while, but if you're following blindly, and relying on what somebody out there is saying, you're shortchanging yourself. You're vulnerable if something goes bad. Caveat emptor: Buyer beware."

The trading world has long been home to various websites where users post their trades -- either real or practice -- for others to see. There are comparatively fewer platforms for people more interested in long-term, stock-and-bond investing. But as millennials become more attuned to their portfolios, entrepreneurs are targeting that demographic with new investing-oriented social platforms.

OpenFolio is a New York-based company launched by former Wall Street bond traders who wanted to bring the open culture of a professional trading room to retail investors. The company likens the process of sharing investment information to that of sharing on applications such as Foursquare, Spotify and TripAdvisor. OpenFolio users post their portfolio holdings and track metrics such as performance, fees and risk against other users.

Rather than communicating via 1990s-style chat rooms, OpenFolio users have a mobile app. OpenFolio is different from a robo-advisor. It is not a custodian of client accounts and holds no actual funds. Users simply upload their portfolio data and learn how they stack up against others.

OpenFolio's head of marketing and business development, David Ma, says the service is aimed at millennials, although it has users of all ages. To get away from pure performance comparisons, the firm has developed metrics to track behaviors associated with successful investing. Ma says investors with the best performance are those who are more diversified, mitigate the risk in their portfolios, trade less than average and avoid holding too much in cash.

The company places an emphasis on gathering and analyzing user data to help people become more successful investors. "The focus isn't on what trades people are making, but how their investment portfolios are allocated. The more important thing is getting invested and staying invested for the long term," Ma says.

"Our data shows that stock picking doesn't always beat the market in the long run," he adds. "You expose yourself to a lot of risk through stock picking, when you may be better off just staying diversified."

Sophia Bera, founder of Minneapolis-based Gen Y Planning, works with financial planning clients throughout the country. Like OpenFolio, she works mostly with millennial clients. Bera applauds the transparency of platforms that allow users to share investment data, but says people should be careful about using portfolio returns as the sole benchmark of success.

"For many years in financial services, it was a lot of brokers and fund managers and other people managing money who saw their value as the 'secret sauce' of investment that they brought to the table. It's interesting now, because you can see everybody's secret sauce, and a lot of people can learn from that," she says.

However, a potential downside of social-network-style investing is that people may lose sight of their own objectives. "That could sometimes distract us from what's going on in our own personal economy," Bera says. "These platforms can be good to motivate some people to invest more or get more serious about their future and building a financial plan. But they could also possibly have people taking more risk without understanding if that's appropriate for their situation."

Bera uses a goals-based planning approach with her clients, focusing on their unique situations, rather than maneuvering portfolios to generate the highest potential returns. "A lot of the big wins don't have to do with stocks. It's signing up for your 401(k), increasing your contributions by 1 or 2 percent a year, saving for a down payment on a home, paying off your student loans faster. I have a client who paid off $100,000 in law school loans in five years. Those things are going to have a much bigger impact on people's overall financial health than trying to get a 15 percent return on the market," she says.

David Cowles, director of investments at Mosaic Financial Partners in San Francisco, also believes planning should take precedence over investment decisions. Mosaic is among investment management firms sharing actual portfolio allocations on Covestor, which lets users mirror the professionals' moves.

Covestor, recently acquired by Interactive Brokers, offers about 130 portfolios to match any desired risk level or interest in specific investments such as commodities, dividend payers or active stock selection. It also features portfolios constructed by nonprofessionals. Users see information such as fees, risk levels and performance when choosing which manager to mirror.

Mosaic's Covestor portfolio uses exchange-traded funds in a diversified strategy, grounded in modern portfolio theory. An advantage of putting the portfolio on the site, he says, is that younger investors and those with smaller accounts can invest in the same cost-effective, diversified way as Mosaic's high-net-worth clients.

However, he worries that users of Covestor and similar platforms, who don't have the guidance of a financial planner, may chase the performance of whatever did well in the past 12 months.

"We don't believe in market timing or going in and out of something like gold based on hunches, or trying to follow the guys who pick the best stocks. That's not good for the retail public," Cowles says. "My concern is that no one is really advising them what they should be doing."

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