Failure to Delegate
50 Pages Posted: 15 Mar 2015
Date Written: March 13, 2015
This paper documents a sharp reversal of individual investors' tendency to delegate their equity investments between 2007 and 2011, primarily based on a representative sample of 40,000 self-directed clients at one of Germany's largest retail banks. At the beginning of 2007, the typical sample investor holds 44% of his equity investments in stock funds; at the end of 2011, this fraction has dropped by about half. Much of the drop occurs at the height of the 2008 and 2011 financial crises, implying that investors take on idiosyncratic risk precisely when equity market volatility peaks. The failure to delegate is not special to the sample; it can also be detected in the broader German investor population and among U.S. households. The failure to delegate is costly: sample investors who tilt their equity portfolio towards individual stocks experience returns that are 25% more volatile and 2% per year lower, on average, than had they simply held on to their more delegated portfolios. The explanation for the decline in delegation that appears to be most consistent with the data is that investors perceive opportunities in individual stocks during the recent financial crises, but do not trust active fund managers to exploit these opportunities on their behalf.
Keywords: Individual investors, portfolio choice, delegated investing, equity portfolio diversification, financial crisis
JEL Classification: G01, G11
Suggested Citation: Suggested Citation