Do individuals understand their actual aggregate investing/trading performance? In their July 2007 paper entitled “Why Inexperienced Investors Do Not Learn: They Don’t Know Their Past Portfolio Performance”, Markus Glaser and Martin Weber measure whether individual investors can correctly estimate personal absolute and relative stock portfolio performance. Using the responses of 215 online investors to a 2001 internet survey and actual portfolio returns for these investors during 1997-2000 as calculated from their holdings during that period, they find that:
- Actual gross returns for respondents range from -16% to +24% per month. On average, they underperform appropriate benchmarks, with a mean monthly return during 1/97-3/01 of 0.54% compared to 2.02% for the DAX.
- Individual investors cannot accurately estimate actual personal stock portfolio performance over the past four years. The correlation between their self-estimated and actual returns is close to zero.
- Individual investors estimate on average that 47% of other investors earn higher returns than they do. About 30% of respondents rate their returns as average.
- Individual investors with more investing experience and higher actual past portfolio returns make better estimates of past personal returns. The improvement is significant for those with more than five years of investing experience.
- Conversely, individual investors with lower actual returns make worse estimates of personal returns. Fewer than 5% of respondents think they had negative returns, but more than 25% actually had negative returns.
- Individual investors who think that they had above average past performance actually did not. Also, high actual returns do not tend to make individual investors overconfident in assessing personal past performance relative to other investors.
The following chart, taken from the paper, relates actual (realized) past returns to the returns estimated by survey participants based on responses to: “Please try to estimate the past performance of your stock portfolio at your online broker. Please estimate the return of your stock portfolio from January 1997 to December 2000: [Answer] percent per year on average.” The correlation between these two series is a very weak -0.07. The difference between the mean estimated return and the mean actual return is +11.5% per year, a significant overstatement of past performance. However, more than 50% of respondents correctly estimate the sign of their past actual returns.
The next chart, also from the paper, relates the actual relative investing performance of respondents to their estimated relative performance based on responses to: “What percentage of customers of your discount brokerage house had higher returns than you in the four-year period from January 1997 to December 2000? (Please give a number between 0% and 100%): [Answer] percent of other customers had higher returns than I did.” The correlation between these two series is -0.01, indicating no relationship. The average difference between the actual return percentiles and the self-assessed percentiles is positive, implying that investors typically overestimate personal relative performance.
In summary, individual investors/traders should be diligent and honest in assessing personal past performance if they want to learn from experience.
Frequently Asked Questions
What does it mean when investors misjudge their own past portfolio performance?
Misjudging past portfolio performance means an individual investor's self-estimated returns differ materially from the returns actually earned. In the Glaser and Weber study of 215 online investors, respondents overstated their 1997-2000 annual returns by an average of 11.5%, and their estimates had almost no relationship to actual results.
Can individual investors accurately estimate their own past stock returns?
No, individual investors generally cannot accurately estimate their own past stock returns. In the study of 215 online investors covering 1997-2000, the correlation between estimated and actual returns was a very weak -0.07, and estimates exceeded actual returns by 11.5% per year on average. More than 50% of respondents did correctly guess the sign (positive or negative) of their returns.
How do researchers test whether investors know their past portfolio performance?
Researchers compared survey responses with actual portfolio returns calculated from investors' holdings. Glaser and Weber surveyed 215 online brokerage customers in 2001, asking for estimated average annual returns and the share of other customers who outperformed them for January 1997 to December 2000, then correlated those answers with actual absolute and relative returns.
Do experienced investors estimate their past returns better than inexperienced investors?
Yes, investors with more experience and higher actual past returns make better estimates of their personal returns, with significant improvement for those with more than five years of investing experience. Investors with lower actual returns make worse estimates. Even so, high actual returns did not make investors overconfident in assessing their performance relative to others.
What are the consequences of investors overestimating their past performance?
Overestimating past performance can prevent investors from learning from experience, since they lack an accurate view of their results. In the study, fewer than 5% of respondents thought they had negative returns while more than 25% actually did, and investors averaged 0.54% monthly versus 2.02% for the DAX over 1/97-3/01. Investors who believed they had above-average performance actually did not, and the sample covers only online brokerage customers in one period.