Individual Investing

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

Do stocks trading on Over-the-Counter (OTC) markets, generally off limits for institutional traders, present in aggregate a good opportunity for individual investors? In their December 2010 paper entitled “Do Investors Overpay for Stocks with Lottery-Like Payoffs? An Examination of the Returns on OTC Stocks”, Bjørn Eraker and Mark Ready examine returns on U.S. OTC Bulletin Board and Pink Sheet stocks. Using stock price and firm data for 11,260 OTC companies (about a third of which were once listed) over the period 2000 through 2008, they find that: Keep Reading

A reader interested in the gap between time-weighted equity returns and actual dollar-weighted returns experienced by investors flagged critiques of prior studies described in:

“Returns for Investors (Rather Than Markets)”: “…the actual aggregate (timing) experience of equity investors is inferior to passive buy-and-hold stock market returns. An active approach of buying after pronounced capital outflows from the market and selling after pronounced capital inflows to the market is likely to be successful.”

“Actual Return Experience of Hedge Fund Investors”: …actual hedge fund investor return/risk experience, due to the timing of entries and exits, is much worse than that indicated by the continuously measured returns and volatilities of the funds themselves.”

The critiques of these findings are a January 2008 paper entitled “Dollar-Weighted Returns to Stock Investors: A New Look at the Evidence” by Aneel Keswani and David Stolin, and a November 2010 paper entitled “Historical Returns: Hindsight Bias in Dollar-Weighted Returns” by Simon Hayley. Using the same data considered in the first study above, along with some additional data, the authors of these critiques argue that: Keep Reading

Author Meir Statman states that his 2010 book What Investors Really Want “is about what we want from our investments. It is about how we think about our investments, how we feel about them, and how investment markets drive us crazy as we try to cajole them into giving us what we want… The sum of our wants and behaviors makes financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and at other times popping them.” Reflecting on “what we really want from our investments” with citations to a large body behavioral finance research, he concludes that: Keep Reading

Do investors think differently about winning and losing positions? In their paper entitled “Why Do Investors Update Reference Prices Asymmetrically?”, Susan Grant, Ying Xie and Dilip Soman conduct four laboratory experiments to investigate differences in thought processes engaged by individual investors experiencing winning and losing investments. Using results of experiments involving 60-95 university students (mostly undergraduate) enrolled in business courses, they find that: Keep Reading

Should long-term investors view their retirement portfolios more like houses than savings plans? In other words, should they start out with considerable leverage and draw the leverage down gradually over time? In their October 2010 paper entitled “Diversification Across Time”, Ian Ayres and Barry Nalebuff investigate the effects of initially implementing and then gradually phasing out leverage for long-term (retirement) equity investment. This strategy exploits the large present value of investments made early in life, while protecting accumulated wealth from equity market volatility late in life. Tests limit initial leverage to 200%. Using return data for U.S. stocks and margin interest rate estimates over the period 1871 through 2009, they conclude that: Keep Reading

Is participation in stock message boards/forums a net plus or net minus for the typical investor? In their July 2010 paper entitled “Confirmation Bias, Overconfidence, and Investment Performance: Evidence from Stock Message Boards”, JaeHong Park, Prabhudev Konana, Bin Gu, Alok Kumar and Rajagopal Raghunathan investigate how investors process message board information and analyze the impact of message processing on return expectations and investment performance. Using an incentivized online experiment conducted via the South Korean Naver.com message board to measure prior beliefs, information processing behavior and expected performance of 502 individual investors during October 7-21, 2009, they find that: Keep Reading

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: Keep Reading

How much individual investing is lottery-like, just hoping for a big score with no analysis? In their June 2010 paper entitled “Natural Experiments on Individual Trading: Substitution Effect Between Stock and Lottery”, Xiaohui Gao and Tse-Chun Lin relate individual trading activity to national lottery jackpot size in Taiwan. Using twice-weekly lottery jackpots and contemporaneous Taiwan Stock Exchange individual trading data at the market and firm levels spanning 2002-2009 (1,495 lottery drawings), they find that: Keep Reading

Do individual investors vary stock trading behavior according to the friction associated with trading? In his May 2010 paper entitled “Liquidity Clienteles: Transaction Costs and Investment Decisions of Individual Investors”, Deniz Anginer investigates the relationship between position holding period and trading friction (stock illiquidity) and the effect of this relationship on net investment performance. Using data from a large discount brokerage firm encompassing two million trades of 66,000 households over the period 1991-1996, he concludes that: Keep Reading