Cubicle Copying – What It Is and Why To Avoid It At All Costs

Another excellent topic I wanted to point out that came to mind as I was reading David Bach’s book, Smart Couples Finish Rich, is a topic called “cubicle copying.”
Even though it has a funny sounding name to it (as far as finance topics are concerned), it is actually very serious business. Furthermore, it is something that can significantly cost you financially, if you participate in it.
So, just what is cubicle copying?
Essentially, cubicle copying is when an individual obtains financial advice for investments by simply asking their officemates what they invest in.

A good example of this is described below:

James just got his first job out of college as a chemical engineer at the paper plant in Southeast Virginia. Being fresh out of school, the only thing he knows about investing is that he should set up a 401k account with his employer.

Unfortunately, he doesn’t know the first thing about asset allocation or index mutual funds. More specifically, he doesn’t know whether to choose between the different options (small cap, large cap, S&P500, bond, international, etc) for mutual funds that his company’s 401k offers.

Since he isn’t really sure, James walks over to Kim’s office (Kim is a 23 year old chemical engineer that just started at the same plant 8 months ago) and asked in which mutual fund(s) she invests. She then tells him that she invests in the small cap mutual fund because it had the best performance over the past 5 years.

James says, “Great! I’ll do the same!” He then proceeds to set up his account to invest 100% of his 401k funds in the small cap mutual fund. He doesn’t even take in to consideration that 1) past performance in no way is an indication of future performance, 2) Kim is not a financial professional, or 3) whether or not the small cap fund is actively managed or not.


In other words, it is just a poorly thought-out financial decision.

How many people undertake this risky practice?

A good answer would be, “More than you might think.”
This practice is something that myself (yes, myself) and many of the people I have worked with have been guilty of. This is all the more reason that you want to identify this and avoid it!
What are the financial ramifications of cubicle copying?
Several of the negative ramifications that could result from the practice of cubicle copying are shown below.
  • Paying high mutual fund management fees for actively managed funds, thus decreasing overall return.
  • Being overexposed or underexposed to certain assett classes, depending on your age and tolerance to risk.
  • Being insufficiently diversified (if for example, you were to buy company stock with 100% of your 401k funds).
To illustrate the financial ramifications, let’s go through 2 scenarios involving our friend, James, having different investment holdings during the recent 2007-2009 stock market downturn.
Scenario 1 – Assumes that James holds only the small-cap mutual fund that Kim recommended
  • James would have experienced a -54% decrease in his 401k holdings during the timeframe of May 2007-March 2009.
  • This 54% decrease is the return of the small cap mutual fund.
Scenario 2 – Assumes that James holds 75% of his 401k funds in the small-cap mutual fund and 25% in a short-term bond mutual fund, after reading the book, Stocks for the Long Run by Jeremy Siegel. This split is not perfect, but it is getting closer to the proper asset allocation proportions between fixed income and equity securities for someone in their mid 20’s.
  • Since James holds two mutual funds with different returns (3.2% increase for bond fund and 54% decrease for small cap fund), his total 401k return would be a mix of the two instruments.
  • James would have experienced a -40% decrease in his 401k holdings during the timeframe of May 2007-March 2009. The calculation for this is shown in in the bullet below.
  • 0.25 x 3.2% + 0.75 x -54% = -40.02%
Assuming that James had a total of $50,000 saved at the time that this downturn first occurred, Scenario 1 would have resulted in $27,000 loss, and Scenario 2 would have resulted in a $20,000 loss.
Clearly, the $7,000 difference between these two scenarios shows how dangerous blind cubicle copying can be. It is defintely a reminder that we need to analyze everything for ourselves, and adjust according to fit our specific needs.

Keep on learning!

Jacob

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Comments

  1. myfijourney says:

    Variations of cubical copying are rampant. I have friends who love to give investment advice about what the next big thing is going to be. I used to think that they must be really bright and well informed until I started learning about investing and personal finance. Now I've come to the conclusion that they weren't well versed in investing, but rather just have a knack for stating baseless opinions with tons of confidence.
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