Learning by Individual Investors

September 21, 2012 • Posted in Individual Investing

Does experience improve individual investing performance? In the August 2012 version of their paper entitled “Do Individual Investors Learn from Their Mistakes?”, Maximilian Koestner, Steffen Meyer and Andreas Hackethal examine whether investors learn to avoid portfolio underdiversification, overconfidence (overtrading) and the disposition effect (selling winners and holding losers). They consider three measures of investor experience: cumulative number of trades initiated; number of months with at least one trade; and, cumulative number of securities traded. Using complete trading histories, demographics and other characteristics for 19,487 German retail investors during January 2000 through December 2007, they find that:

  • Investors in the sample tend to be male, about 40 years old, self-directed regarding investment choices and near the beginning of their investing lives.
  • As investors gain experience, their investment performance improves, with 100 incremental trades associated with a 0.15% increase in monthly portfolio performance.
    • Improvement derives largely from declining portfolio turnover, with 100 incremental trades associated with 0.8% lower monthly turnover (average monthly turnover is 16.2%).
    • Experience does not mitigate underdiversification or the disposition effect. If anything, experience exacerbates these two investor mistakes.
  • Findings are robust across types of investors, market environments and investment styles.

In summary, evidence indicates that investors learn to trade less as they gain experience, perhaps due to the immediate feedback associated with transaction costs, but they do not learn to diversify or avoid the disposition effect.

One caution regarding findings is that the sample may not be representative of other types of investors.

Why not subscribe to our premium content?
It costs less than a single trading commission. Learn more here.
Email Subscribe
Current Momentum Winners

ETF Momentum Signal
for July 2016 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
11.4% 11.8%
Top 3 ETFs SPY
12.8% 7.3%
Strategy Overview
Current Value Allocations

ETF Value Signal
for July 2016 (Final)





The asset with the highest allocation is the holding of the Best Value strategy.
Gross Compound Annual Growth Rates
(Since September 2002)
Best Value Weighted 60-40
12.6% 9.8% 7.9%
Strategy Overview
Recent Research
Popular Posts
Popular Subscriber-Only Posts