How Should Individual Investors Diversify? An Empirical Evaluation of Alternative Asset Allocation Policies

Abstract

This paper evaluates numerous diversification strategies as a possible remedy against widespread costly investment mistakes of individual investors. Our results reveal that a very broad range of simple heuristic allocation schemes offers similar diversification gains, as well-established or recently developed portfolio optimization approaches. This holds true for both international diversification in the stock market and diversification over different asset classes. We thus suggest easy-to-implement allocation guidelines for individual investors.

Keywords: portfolio theory, household finance, asset allocation, international diversification, heuristics

JEL Classification: G11