'Other People’s Money': The Trading Performance of Household Investors vs. Delegated Money Managers

Abstract

We utilize seventeen years of comprehensive daily portfolio and trading data identified at the individual investor level, to analyze the relative trading performance of the entire universe of households, all domestic financial institutions and all foreign institutions in the Finnish market. We introduce a new methodology we dub the “holding-period-invariant” (HPI) portfolio approach. The conventional calendar-time portfolio approach imposes a heroic assumption that all investors mechanically realize (i.e., trade) their portfolio at specified intervals corresponding to an assumed horizon. By contrast, our methodology is free of such bias and allows for the endogenous nature of investment timing decisions made by numerous informed households (and, for that matter, domestic institutions). Adopting a random informationless trading benchmark, we find that the households who choose to trade for themselves are economically and statistically superior traders, achieving an impressive internal rate of return of 42.84% p.a., or 0.0288% of traded value, when foreign institutions are their exclusive counterparty. (Domestic institutions trading with foreigners do even better at 51.8% p.a.). Our findings are contrary to some of the existing empirical literature on household investors derived from calendar-time portfolios. When we split households into informationally advantaged (i.e., located near Nokia) and disadvantaged, we find that while the former are the superior traders, both household groups continue to outperform foreign investors and Helsinki households outperform their domestic institutional rivals.

Keywords: Households, Institutional investors, Calendar-time, Horizon-invariant, Trading performance

JEL Classification: G11, G12, G14