What is the recent evidence on the performance of individual investors? Do some persistently outperform and, if so, why? In the February 2007 draft of their paper entitled “The Performance and Persistence of Individual Investors: Rational Agents or Tulip Maniacs?”, Rob Bauer, Mathijs Cosemans and Piet Eichholtz examine the performance and persistence of individual investors trading at a Dutch online broker. Using a database consisting of more than 68,000 accounts and eight million trades in stocks, bonds and derivatives during January 2000 to March 2006, they find that:
- Individual investors tend to hold high beta, small stocks. While 65% of these investors do not trade on a monthly basis, a small group trades actively.
- During 2000-2006, the average investor has negative alphas. Not even the top tenth of performance manages to beat the market consistently. Those in the bottom tenth of performance lose more than 90% of value.
- The main cause of underperformance is costly and poorly time derivatives trading. Derivatives traders underperform other individual investors by an average 1.6% (3.3%) per month in gross (net).
- While the most active traders tend to outperform based on gross returns, they rank last based on net returns. Transaction costs penalize the performance of such traders by an average -3.5% per month.
- Women tend to outperform men, particularly during a declining market, due to less frequent trading and less risky portfolios.
- Large accounts tend to outperform small accounts, with the largest fifth beating the smallest fifth by nearly 2% per month net.
- Investor age is generally unrelated to account performance.
- There is strong evidence of performance persistence among individual investors. The top tenth based on one-year past performance continue to outperform investors in the bottom tenth by 2.8% per month net. Performance persistence is weaker for shorter intervals of past performance.
In summary, it is very difficult for individual investors to beat the market. Infrequent trading and lower-risk holdings have been key to relative outperformance since 2000.
