Individual Investing

In the introduction to his 2013 book entitled The Alternative Answer: The Nontraditional Investments That Drive the World’s Best-Performing Portfolios, author Bob Rice (Alternative Investment Editor at Bloomberg Television) states that his: “…basic approach is an adaptation of the strategic asset allocation model that endowments have used for years, one that reflects two critical modifications. First, there is great focus on liquidity and inflation-protected income. Second, it incorporates the latest analysis regarding portfolio construction, specifically regarding accumulation of risk premiums and avoidance of cross-asset vulnerabilities. …Modern investors need modern tools. And they exist; it’s just that there’s been no reliable user’s guide. Now, I hope, there is.” Based on the practices of selected “elite” investors, he concludes that: Keep Reading

In the prologue of their 2013 book entitled Happy Money: The Science of Smarter Spending, authors Elizabeth Dunn and Michael Norton state: “When it comes to increasing the amount of money they have, most people recognize that relying on their own intuition is insufficient, spawning an entire industry of financial advisors. But when it comes to spending that money, people are often content to rely on their hunches about what will make them happy. And yet, if human happiness is even half as complicated as the stock market, there is little reason to assume that intuition provides a sufficient guide. …trying to uncover the causes of your own happiness through introspection is like trying to perform your own heart transplant. You have some idea of what needs to be done, but a surgical expert would come in handy. Consider us your surgical experts.” Making liberal use of anecdotes to illustrate findings from an array of happiness research projects, they conclude that: Keep Reading

Kathleen Peddicord, publisher of the Live and Invest Overseas group, opens her 2013 book, How to Buy Real Estate Overseas, by stating: “The idea of diversifying your investments, your assets, your life and your future overseas can seem frightening, intimidating, even paralyzing. Could you really do it? Yes, you could. I say that based on 30 years of experience at this.” The book takes the perspective of a U.S. citizen seeking to diversify assets via direct ownership of non-U.S. real estate. Using examples based on her experience investing in real estate in 20 countries and operating businesses in seven, she concludes that: Keep Reading

What lessons do individual investors learn as they gain experience? In their November 2012 paper entitled “Do Stock Traders Learn From Experience? Evidence from an Emerging Market”, John Campbell, Tarun Ramadorai and Benjamin Ranish examine the evolution of performance and trading behaviors with experience among individual investors in Indian stocks. The Indian market has a rapidly growing investor base with direct equity ownership prevalent . Based on data available, they focus on relationships between account age and portfolio changes. Using random samples of monthly data for individual Indian accounts during 2002 through 2011, they find that: Keep Reading

Are investment advisors worth the price? In the August 2012 version of their paper entitled “The Impact of Financial Advisors on the Stock Portfolios of Retail Investors”, Marc Kramer and Robert Lensink investigate the impact of financial advisors on individual investor portfolio returns, risk, trading frequency and diversification. For sampled investors, the sponsoring bank standardizes strategic asset allocation advice, but the advisors made available to investors by the bank have great latitude in recommending specific stocks. While all investors are eligible for advice, each elects either an advisory relationship (randomly selected advisors) or self-directed trading. The study emphasizes controlling for any self-selection bias associated with the type of investors who seek advice, and focuses on common stock holdings to avoid any conflicts associated with mutual fund incentives. Using demographics and complete histories of common stock positions and trades for 5,661 individual advised and self-directed Dutch investors during April 2003 through August 2007 (193,418 monthly returns), they find that: Keep Reading

Does experience improve individual investing performance? In the August 2012 version of their paper entitled “Do Individual Investors Learn from Their Mistakes?”, Maximilian Koestner, Steffen Meyer and Andreas Hackethal examine whether investors learn to avoid portfolio underdiversification, overconfidence (overtrading) and the disposition effect (selling winners and holding losers). They consider three measures of investor experience: cumulative number of trades initiated; number of months with at least one trade; and, cumulative number of securities traded. Using complete trading histories, demographics and other characteristics for 19,487 German retail investors during January 2000 through December 2007, they find that: Keep Reading

How do relevant electronic social networks affect individual investing? In their March 2012 paper entitled “Facebook Finance: How Social Interaction Propagates Active Investing”, Rawley Heimer and David Simon investigate the propagation of active investing strategies within a Facebook-like social network of retail foreign exchange traders. Registered users of this free network (who must have a qualified foreign exchange broker account) have access to: (1) an indicator of the aggregate positions of the entire network in specific currency pairs; and, (2) a real-time view of the trading activity of mutually accepted “friends.” The network receives information about user trades instantly from qualified brokers. Using a complete record of activities within this network involving more than 5,500 foreign exchange traders, two million time-stamped trades and 140,000 messages and friendships mostly between February 2009 and December 2010, they find that: Keep Reading

Is individual investing truly a tale of woeful mistakes and biases? In their March 2012 paper entitled “No Skill, Mere Luck? – An Analysis of Individual Investors’ Investment Performance”, Andreas Hackethal, Steffen Meyer, Dennis Schmoltzi and Christian Stammschulte apply bootstrapping simulations based on actual portfolios to distinguish skill from luck among a sample of individual German investors. They use a four-factor model (market, size, book-to-market and momentum) to estimate risk-adjusted performance (alpha). Using weekly gross and net portfolio returns for 8,621 retail investors employing a German online broker during September 2005 through April 2010 (242 weeks), they find that: Keep Reading

How overconfident are individual investors, and how does overconfidence affect their investing practices? In his November 2011 paper entitled “Financial Overconfidence Over Time | Foresight, Hindsight, and Insight of Investors”, Christoph Merkle examines relationships between the return/risk expectations of affluent, self-directed private investors and their trading activity, diversification and risk taking. To frame the relationships, he considers three elements of overconfidence:

1. Overplacement: “I am better informed, more experienced and more skillful in investing than average.”
2. Overprecision: Confidence intervals for expectations are too narrow (expected volatility is too low).
3. Overestimation: Recollected performance is higher than actual performance.

Using quarterly survey data (617 total respondents, with at least 130 in each of nine rounds) and associated investment portfolio characteristics/activity (49,372 trades) for several hundred investors having online brokerage accounts with a UK bank between June 2008 and December 2010, he finds that: Keep Reading

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: Keep Reading