Individual Investing

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: Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading

Do individual investors actually trade on their stated beliefs? In their February 2011 paper entitled “Do Investors Put Their Money Where Their Mouth Is? Stock Market Expectations and Trading Behavior”, Christoph Merkle and Martin Weber compare quarterly risk and return expectation survey responses to actual trading data and portfolio holdings for a group of self-directed individual UK investors. Using this investor data, along with contemporaneous measures of actual FTSE All-Share Index returns and volatility during 2008 through 2010 (first survey in September 2008 and last in September 2010), they find that: Keep Reading

What accounts for the persistence in diversity of investor beliefs and behaviors? Why does logical inference from common data not drive common attitudes and actions? In their March 2011 paper entitled “Serotonin and Risk Taking: How Do Genes Change Financial Choices?”, Camelia Kuhnen, Gregory Samanez-Larkin and Brian Knutson investigate differences in investing beliefs and behaviors associated with variations of a single gene (the serotonin transporter). Using demographic and financial information, tests of cognitive ability and numeracy, and measurements of attitudes toward financial decisions for 60 individuals recruited to be representative of San Francisco Bay Area adults, they find that: Keep Reading

Do emerging markets exchange-traded funds (ETF) reliably track and on average achieve the returns of benchmark indexes? In their February 2011 paper entitled “Evaluating the Performance of Global Emerging Markets Equity Exchange-Traded Funds”, David Blitz and Joop Huij examine the performances of emerging markets ETFs comprised of country markets such as South Korea, China, India, Brazil, South Africa and Russia. Stock markets in these countries generally exhibit higher volatilities, lower liquidities and regulatory differences compared to developed markets. Using monthly closing trades, net asset values and expense data for seven ETFs that track broad emerging markets indexes, manage at least $100 million in assets and have live histories of at least one year from inception (ranging from April 2003 to July 2007) through December 2010, they find that: Keep Reading