What motives and methods of individual investors enhance performance? In their June 2010 paper entitled “Behavioral Portfolio Analysis of Individual Investors”, Arvid Hoffmann, Hersh Shefrin and Joost Pennings analyze how systematic differences in investor objectives and strategies impact the portfolios they select and the returns they earn. Using 5,500 responses from a 2006 survey of individual account holders at an online broker in the Netherlands matched to detailed trading activity during January 2000 through March 2006, they conclude that:
- Investors driven by speculation have higher portfolio turnover, take more risk, judge themselves to be more advanced and underperform relative to investors driven by the need to build a financial buffer or save for retirement (see the first chart below).
- Investors who rely on fundamental analysis have higher portfolio turnover, take more risks, are more overconfident and outperform investors who rely on technical analysis (see the second chart below).
The following charts, constructed from data in the paper, summarize average raw net monthly returns by principal investor motive (upper chart) and principal investor method (lower chart) over the sample period. Results suggest that:
- Speculation based on technical analysis may be a particularly unfavorable combination.
- Professional advice may not boost performance.
- Fundamental analysis may beat technical analysis.
In summary, evidence from a limited test period suggests that conservative investing motives tend to outperform a speculative motive and that both news-augmented intuition and fundamental analysis tend to outperform technical analysis.
