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?
- 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).
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.
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%
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