It
seems as though Wall Street’s shady strategies have finally caught up
with technology. We wrote in
Wealth Without Worry
about a technique known as “splitting the deck.” While the method we
described utilizes the somewhat antiquated stockbroker practice of cold
calling, there’s now a way for potential investors to split the deck
themselves. This newest concept comes in the form of virtual investing.
Many
online brokerages and financial services companies now offer investors a
chance to invest without using real money. Through online accounts,
potential investors are given large hypothetical amounts of money, $1
million or more, and encouraged to trade freely. The programs cost
nothing and require no commitment.
At
first blush, it sounds as if these programs are doing investors a “try
before you buy” favor. Truth is, however, the situation is an inaccurate
gauge of what real investing is like. To begin with, users are offered
historical data that may no longer be applicable. In addition, they’re
using make-believe money, most often in amounts greater than they might
have on their own. That not only gives a skewed perception, but playing
with house money also tends to minimize heightened emotions, which come
into play when the dollars and deals are real.
Maybe half of the people who try virtual investing will get lucky.
They’ll make a few good picks, double their money and be sold on the
whole idea. Once that happens, they open an account and try it with real
money, to the delight of the brokerage company, who then makes
commissions off of investor activity. For the investor, however, the
stakes are higher and what started out as casual trading turns into
serious business. Most, based on what we know about active management,
will go on to lose money.
But
what about those who didn’t have good luck with the online trading? They
go away. They’ll realize it wasn’t for them and the company offering the
service doesn’t care. After all, with brokerage companies reporting
thousands of new users, who needs cold calling?
