Abstract
While many individuals make investments to gain financial stability, most individual investors hold under-diversified portfolios that consist of only a few financial assets. Lack of diversification is alarming especially for average individuals because it may result in massive drawdowns in their portfolio returns. In this study, we analyze if it is theoretically feasible to construct fully risk-diversified portfolios even for the small accounts of not-so-rich individuals. In this regard, we formulate an investment size constrained mean-variance portfolio selection problem and investigate the relationship between the investment amount and diversification effect.
Highlights
Achieving financial sustainability is a basic goal for everyone and it has become a shared concern globally due to increasing life expectancy
Low financial sustainability may refer to individuals with low financial wealth, as well as investors with a lack of financial literacy
We discuss the viability of small account diversification for individual investors with a relatively smaller level of wealth than investors—often classified as high-net-worth individuals
Summary
Achieving financial sustainability is a basic goal for everyone and it has become a shared concern globally due to increasing life expectancy. Low financial sustainability may refer to individuals with low financial wealth, as well as investors with a lack of financial literacy. For individuals with limited wealth, financial sustainability after retirement is a real concern because of uncertainty in pension plans arising from relatively early retirement age and change in the demographic structure (see, for example, [1,2]). One form of attaining financial independence is through investment in financial assets. Regarding low financial sustainability due to financial illiteracy, investment in funds (e.g., mutual funds) are often recommended. Even though funds provide exposure to stock markets, sectors or countries, understanding detailed fund structure and selecting appropriate funds may be more difficult than choosing among familiar companies for investors without much experience [3]
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