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Institute for Financial Research SIFR Research Report Series, Institute for Financial Research

No 25:
All Guts, No Glory: Trading and Diversification among Online Investors

Anders E.S. Anderson

Abstract: I explore cross-sectional portfolio performance in a sample containing 324,736 transactions conducted by 16,831 investors at an Internet discount brokerage firm during the period May 1999 to March 2002. On average, investors hold undiversified portfolios, show a strong preference for risk, and trade aggressively. I measure performance using a panel data model, and explain the cross-sectional variation using investors’ turnover, portfolio size and degree of diversification. I find that turnover is harmful to performance due to fees, and is therefore more predominant among investors with small portfolios. It is argued that the degree of diversification is a proxy for investor skill, and it has a separate and distinct positive effect on performance. These findings are helpful in explaining the overall result that investors underperform the market by around 8.5% per year on average.

Keywords: Investor behavior; Performance evaluation; Panel data models; (follow links to similar papers)

JEL-Codes: C33; D14; G11; (follow links to similar papers)

52 pages, April 19, 2004

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