Individual Investing

How do individual investors adjust trading behaviors during bull and bear markets? Are any such adjustments advantageous? In their December 2011 paper entitled “Don’t Confuse Brains with a Bull Market: Attribution Bias, Market Condition, and Trading Behavior of Individual Investors”, Zhen Shi and Na Wang examine the trading behaviors of individual investors during different market conditions. They apply a regime switching model to the Chinese stock market to identify: a normal market during January 2005 through August 2006; a bull market during September 2006 through October 2007; and, a bear market during November 2007 through November 2008. They define excessiveness of trading based on two measures: (1) the performance of stocks bought versus that of stocks sold; and, (2) the relationship between portfolio turnover and performance. Using the trading records of 15,040 randomly selected individual Chinese investors during January 2005 through November 2008 (2,357,959 trades), they find that: More…

Do individuals who actively reallocate funds within their pension accounts outperform passive counterparts? In their October 2011 paper entitled “Individual Investor Activity and Performance”, Magnus Dahlquist, Jose Vicente Martinez and Paul Soderlind examine the activity and performance of individual participants in Sweden’s Premium Pension System. This system allows individual participants to reallocate among available mutual funds on a daily basis with no switching fees/impediments. Information about the 1,230 funds offered during the sample period includes type (fixed income, balanced, life-cycle and equity), return and risk measured at several horizons, fee and major holdings. Most are equity funds, about half of which invest primarily in international equities. The government assigns individuals who make no choice to a default fund. Using daily net returns, fund trades and demographics for 70,755 individuals (from a random draw of individuals in the system over the entire period) and contemporaneous returns for several benchmarks during September 2000 through May 2010, they find that: More…

Do futures day traders make money? In the March 2011 version of their paper entitled “Overconfident Individual Day Traders: Evidence from a Natural Experiment”, Wei-Yu Kuo and Tse-Chun Lin investigate overconfidence and performance of day traders in the Taiwan futures market. They identify day trades as those committed to close on the same day as a condition of enjoying halved margin deposits. Using complete Taiwan Futures Exchange trading records in Taiwan dollars (TWD) during October 8, 2007 through September 30, 2008 (348,000 trades associated with 3,470 individual day traders who conduct more than 5 day trades), they find that: More…

How do individual investors respond to an offer of free, unbiased investment advice? In their August 2010 paper entitled “Is Unbiased Financial Advice To Retail Investors Sufficient? Answers from a Large Field Study”, Utpal Bhattacharya, Andreas Hackethal, Simon Kaesler, Benjamin Loos and Steffen Meyer evaluate the responses of 8,195 randomly selected active and likely self-directed individual clients of a large European broker to an offer of free advice. This advice, unbiased in that it is free of monetary incentives for the broker, consists of personalized written and verbal guidance on mean-variance optimization of the client’s existing portfolio based on the client’s risk tolerance, wealth and investment horizon. The broker initiated the offer via email, with telephone follow-ups by an advisor to non-respondents. Using portfolio holder characteristics and daily portfolio holdings/price data from September 2005-May 2009 pre-offer, May 2009-October 2009 offer and post-offer measurement intervals (through March 2010), along with advised portfolio adjustments, they find that: More…

Do distinct neural processes for rewards and punishments result in distinct variation in learning about financial gains and financial losses? If so, is such variation material to wealth-building? In their September 2011 paper entitled “Gain and Loss Learning Differentially Contribute to Life Financial Outcomes”, Brian Knutson, Gregory Samanez-Larkin and Camelia Kuhnen examine whether individual differences in gain learning and loss learning relate distinctly to cumulative financial outcomes. Specifically, they relate gain and loss learning separately to self-reported measures of assets and debts (as partially corroborated by credit reports), controlling for other potentially confounding individual characteristics. Using results of a financially incentivized learning experiment involving a representative sample of 75 San Francisco area residents, they find that: More…

Is fine wine a good investment? Two recent studies are on the case. In their February 2010 paper entitled “Raise your Glass: Wine Investment and the Financial Crisis”, Philippe Masset and Jean-Philippe Weisskopf examine the risk, return and diversification benefits of fine wine. In their August 2011 paper entitled “Is Wine a Premier CRU Investment?”, Liam Devine and Brian Lucey investigate Bordeaux and Rhone wines as investments. Both studies employ repeat-sales regressions from auctions via The Chicago Wine Company to construct wine price indexes. Using wine auction prices and other sources of wine returns from as early as January 1996, they find that: More…

What does the body of academic research say about the stock trading behaviors and outcomes for individual investors? In their June 2011 paper entitled “The Behavior of Individual”, Brad Barber and Terrance Odean survey four areas of empirical research on the behavior of individual investors trading individual stocks: (1) performance, (2) the disposition effect, (3) buying behavior and (4) diversification. Using the findings of many studies performed over the last three decades, they conclude that: More…

Do gems offer good returns? How do the returns of these tangible assets compare with those of other asset classes? In the April 2011 version of their paper entitled “Hard Assets: The Returns on Rare Diamonds and Gems”, Luc Renneboog and Christophe Spaenjers examine recent returns on precious gems in U.S. dollars. They concentrate on the upper end of gem quality for three categories: white diamonds, colored diamonds and other gems (emeralds, rubies and sapphires). They consider gem attributes such as weight, color, clarity, cut, location of sale, auction house, brand and certification as allowed by subsample sizes. Using worldwide auction data spanning 1999 (the first year of representative coverage in the source database) through 2010 (3,952 total sales), along with the contemporaneous values of the U.S. Consumer Price Index and returns for other worldwide asset markets, they find that: More…

How effective are tax-deferred savings in avoiding federal income taxes over a lifetime? In their May 2011 paper entitled “The Tax Benefit of Income Smoothing”, Kristian Rydqvist, Steven Schwartz and Joshua Spizman estimate the lifetime benefit of postponing federal income tax liability until retirement by contributing pre-tax dollars to individual or employer-sponsored retirement savings while working. They quantify the benefit as the reduction in average annual lifetime federal income tax rate. They assume a base case of 40 work years (ages 25-65) and a number of retirement years equal to life expectancy minus 65. Using the complete time-series of U.S. income tax history (with focus on 2010 tax tables), they find that: More…

Do individual investors truly benefit from using full service brokers? In the February 2011 draft of their paper entitled “What is the Impact of Financial Advisors on Retirement Portfolio Choices and Outcomes?”, John Chalmers and Jonathan Reuter compare outcomes for those Oregon University System’s Optional Retirement Plan participants who choose a firm that uses brokers to provide personal face-to-face financial services (HIGH level of service) and participants who choose the most popular lower-service firm (LOW level of service). Using demographic and monthly/annual account-level data from earliest availability (mostly 1997 or 1998) through 2009, they find that: More…