Just Unlucky? – A Bootstrapping Simulation to Measure Skill in Individual Investors’ Investment Performance

Abstract:     
Few studies have focused on the measurement of individual investors’ investment performance and more extensive research has been conducted on biases and investment mistakes – such as the disposition effect, security selection bias and lacking ability of market timing. No study so far has focused on measuring whether the realized performance was driven by skill or mere luck. This paper disentangles skill and luck in individual investors’ investment performance using a four-factor model and apply bootstrapping simulations pioneered in the mutual fund literature to distinguish skill from luck. We use a comprehensive dataset of 8,621 individual investor portfolios from a German online broker, spanning a timeframe from September 2005 to April 2010. We find that 89% of individual investors exhibit negative skill (α ≤ 0) when measured on a gross basis and 91% when considering returns net of costs and expenses. An individual investor with an average level of risk-taking depicts an investment performance of approximately -7.5% per year for gross returns and of -8.5% per year for net returns.

Number of Pages in PDF File: 42

Keywords: individual investors, retail investors, portfolio performance, investment policy, bootstrapping

JEL Classification: D14, G11

working papers series