SIFR Research Report Series, Institute for Financial Research
Anders E.S. Anderson
All Guts, No Glory: Trading and Diversification among Online Investors
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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