THE COMMON‐STOCK‐PORTFOLIO PERFORMANCE RECORD OF INDIVIDUAL INVESTORS: 1964–70

Abstract

INDIVIDUAL INVESTORS in the aggregate have been consistent net sellers of common stock since the early 1960's. The trend has been away from direct, and toward indirect, investment in such securities.' One plausible explanation of this phenomenon is that individuals believe that the returns they can obtain from self-managed portfolios are inferior to those available from portfolios managed by professionals. While the evolving evidence on institutional/professional investment performance is decidedly mixed, it is conceivable that individuals may still consider themselves, and may in fact be, either less well informed, less skillful, or disadvantaged because of higher transactions costs [18, 23]. One obvious way to evaluate this interpretation of the "withdrawal" phenomenon is simply to compare the investment track record of individuals and institutions. We offer here an analysis of a set of data which allows, for the first time, just such a comparison.2 Specifically, we report on the rates of return earned by a large and diverse sample of individual investors from their common stock portfolios over the seven-year interval 1964 through 1970. These rates of return are contrasted to those which would have been generated during the same interval by both naively-selected portfolios of matching systematic risk and investments in a sample of mutual funds. The findings indicate that, on average, the individual investors studied obtained returns commensurate with the amount of systematic risk they assumed, as did the mutual funds in the sample. The argument that professional portfolio managers are more successful in selecting securities than individual investors is therefore not supported by the evidence. These conclusions are seen to be little affected by alternative procedures for rate-of-return measurement, and to be consistent with previous analyses of the investment behavior of the same sample [16, 21] which were undertaken from a different perspective.