Realized Returns on Common Stock Investments: The Experience of Individual Investors

Abstract

Over the last decade and a half, individual investors in the aggregate have consistently been net sellers of corporate common stocks; simultaneously, the holdings of equities by mutual funds, pension funds, insurance companies, and bank trust funds on behalf of individuals have increased dramatically (Soldofsky 1971; U.S. Securities and Exchange Commission 1971; Board Virtually all existing empirical studies of the American capital market deal with the investment performance record of institutions. The present paper offers data on the investment experiences of a large and representative sample of individual investors, based on a 7-year history of actual trading behavior. Those experiences suggest some reasonable skill in security selection, particularly in connection with shortterm trading cycles. Transactions costs, however, have a substantial impact on realized net returns, rendering the overall performance results observed similar to those available from passive investment strategies over corresponding calendar periods. Financial support for the investigation was provided by the National Bureau of Economic Research, the Investment Company Institute (ICI), the Purdue Research Foundation, the College of Business at the University of Utah, and the brokerage house from whose customer group the investor sample was drawn. The computations were performed at the computer centers of Purdue University and the University of Utah. A substantial portion of the requisite securities price data were obtained from the Wells Fargo Bank of San Francisco, which made available its stock data file to Purdue for the research. Particular thanks are also due: William Elbring of Purdue for his contributions to the computer programming effort; Robert Lipsey and Christine Mortensen of the NBER for their counsel and administrative support; Alfred Johnson of the ICI; James Lorie, Myron Scholes, and Lawrence Fisher of the University of Chicago, for the opportunity to review the findings at seminars sponsored by the Center for Research in Security Prices; James Jenkins, Donald Farrar, and Ramon Johnson of the University of Utah; Edgar Pessemier, Frank Bass, and Donald King of Purdue University; John Lintner of Harvard University; and Marshall Blume of the University of Pennsylvania. The responsibility for the findings is, of course, the authors' alone. While the paper represents a segment of an NBER project, it has not undergone a full critical review by the NBER and should not be considered an official NBER publication.