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Individual Investing

What does it take for an individual investor to survive and thrive while swimming with the institutional and hedge fund sharks in financial market waters? Is it better to be a slow-moving, unobtrusive bottom-feeder or a nimble remora sharing a shark’s meal? These blog entries cover success and failure factors for individual investors.

The Advised, the Non-advised and Frequent Traders

How do financial advisors affect the investing practices of individual investors? Does their advice decisively improve client performance, or are other factors more explanatory? In their February 2009 paper entitled “The Influence of Financial Advisors on Household Portfolios: A Study on Private Investors Switching to Financial Advice”, Ralf Gerhardt and Andreas Hackethal compare the portfolios and transactions of advised and non-advised German investors to determine the effects of advice. They further decompose the sample of investors to explore whether differences between advised and non-advised arise from the advice per se or from investor socio-demographics or trading frequency. Using portfolio compositions and transactions for over 65,000 German investors during February 2006 through July 2007, including 597 who initiated a relationship with a financial advisor during that period, they conclude that: Keep Reading

Actual Return Experience of Hedge Fund Investors

Do hedge fund investors actually receive the returns reported for hedge funds, or does the timing of investments in these funds substantially affect experienced returns? In the March 2009 version of their paper entitled “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, Ilia Dichev and Gwen Yu measure actual hedge fund investor returns by integrating the returns of the funds they hold with the timing and magnitude of their capital flows into and out of these funds. Specifically, they calculate an aggregate internal rate of return (dollar-weighted return) that treats funds as time-ordered investor capital flows, with initial fund market value and fund inflows counted as negative flows and fund outflows and ending market value counted as positive flows. Using monthly net-of-fee return and assets under management data for a large sample of hedge funds over the period 1980-2006, they conclude that: Keep Reading

Winners and Losers Among Equity Investors

Who wins and who loses among equity investors, and why? In the December 2008 version of their paper entitled “Who Win and Who Lose Among Individual Investors?”, Kingsley Fong, David Gallagher and Adrian Lee compare the trading performances of three investor groups, those trading through: (1) institutional brokers; (2) discount retail brokers; and, (3) non-discount retail brokers. They define discount brokers as those offering trading services but no in-house research. They compare performances of these groups based on raw and risk-adjusted trading returns at the close on the trade date and at horizons of 1, 10, 25, 140 and 254 trading days. Using detailed intraday trading records for the Australian stock market spanning February 19, 1990 to December 1, 2005, they conclude that: Keep Reading

The Advised Versus the Self-directed

Do individuals who use investment advisors achieve higher returns than those who do not? Two closely related papers entitled “Investment Advice and Individual Investor Portfolio Performance” of January 2009 by Marc Kramer and “The Impact of Financial Advisors on Individual Investor Portfolio Performance” of March 2012 by Marc Kramer and Robert Lensink address this question. Using monthly portfolio returns for thousands of advised and self-directed individual Dutch investors during April 2003 through August 2007 (52 months), they conclude that: Keep Reading

The Value of Financial Advisors?

How do the typical portfolio and performance of self-directed investors differ from those of investors who employ financial advisors? Do financial advisors systematically add value by providing information to, and tempering the irrationalities of, individual investors? In his March 2008 paper entitled “The Influence of Financial Advice on Individual Investor Portfolio Performance”, Marc Kramer compares the investment portfolio content and performance of advised and self directed investors in the Netherlands. Using portfolio data for a diverse mix of 15,675 individual Dutch investors over the 52-month period from April 2003 to August 2007, he concludes that: Keep Reading

Peer Pressure and Individual Investing Behavior

Does interaction with peers significantly affect the choices of individual investors? Are some individuals more susceptible to such pressure than others? In their April 2008 paper entitled “Susceptibility to Interpersonal Influence in an Investment Context”, A. Hoffmann and Thijs Broekhuizen investigate how interpersonal influences affect the investment decisions of individuals and which individuals are most susceptible to such influences. Combining the results of a laboratory experiment involving 154 university students and a survey of 287 investors, they conclude that: Keep Reading

Success for Collaborating Individual Active Traders?

Does sharing ideas and actions with a community help make individual active traders successful? In the March 2008 version of their paper entitled “Experts Online: An Analysis of Trading Activity in a Public Internet Chat Room”, Bruce Mizrach and Susan Weerts study a group of active traders who voluntarily posted their trades in real time in a free public Internet chat room called Activetrader. Using data on 8,967 trades by 676 traders from four snapshots (64 total trading days) during 2000-2003, along with survey responses from 67 of these traders, they conclude that: Keep Reading

Best-of-Breed for Get-Rich-Quick Option Tips

The unreal deal, as found in the cyber-alleys off Wall Street… Keep Reading

The Out-of-Country Experiences of Individual U.S. Investors

How and why do individual U.S. investors diversify internationally? How significantly does this diversification affect their portfolio results? In their April 2007 paper entitled “Foreign Investments of U.S. Individual Investors: Causes and Consequences”, Warren Bailey, Alok Kumar and David Ng analyze the motivations and consequences of foreign equity investment by individual U.S. investors. Using personal characteristics and portfolio/trading data from tens of thousands of individual brokerage accounts at a major U.S. discount broker for the period 1/91-12/96, they conclude that: Keep Reading

Do Some Individual Investors Consistently Outperform?

Is individual investing an inevitable series of randomly spaced ups and downs, or do some investors persistently enjoy more success than others? In their August 2007 paper entitled “Performance Persistence of Individual Investors”, Limei Che, Øyvind Norli and Richard Priestley investigate performance persistence among individual stock market investors/traders. Using monthly stock portfolio data for all individual investors who traded at least six times every 24 months on the Oslo Stock Exchange during January 1993 through June 2003 (65,848 investors), they find that: Keep Reading

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