Essays on Individual Investors’ Portfolio Performance and Investment Mistakes

Global financial markets move in cycles and give rise to dramatic losses at irregular intervals. A significant amount of these losses is borne by individual investors. Carl Schuster examines the portfolio performance and investment mistakes of individual investors. He provides compelling answers to some of the most intriguing questions in the field of behavioral finance: How much do individuals lose by investing in common stock? Does individual investors’ success vary across financial instruments? Do financial advisors correct the investment mistakes of individual investors? Schuster’s analysis is based on a high-quality data set from a large online broker. The data set includes detailed financial and socio-demographic data of more than 70,000 private investors over an 11-year period. He shows that private investors’ stock portfolios suffer a tremendous risk-adjusted return loss in comparison to their domestic benchmark. A persistent pecking order of financial instruments’ performance is depicted, revealing that investors are most successful with funds and bonds, followed by stocks, certificates and, finally, options. State-of-the-art analyses corroborate that consulting a financial advisor can help reduce investment mistakes. However, the positive effect of financial advice seems to strongly depend on the alignment of interests between the advisor and investor. The insights presented in this book are new and relevant for the academic community and regulators, as well as practitioners and individual investors around the globe.