Portfolio Concentration and the Performance of Individual Investors

45 Pages Posted: 23 Mar 2005  

Zoran Ivkovich

Michigan State University, Department of Finance

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: March 13, 2005

Abstract

This paper tests whether information advantages can help explain why some individual investors concentrate their portfolios in only a few stocks. Using data on individuals' investments through a discount broker from 1991 to 1996, we find that the stock investments made by households that choose to concentrate their brokerage accounts in a few stocks outperform those made by households with more diversified accounts (especially among those with large portfolios). The excess returns of concentrated relative to diversified portfolios are stronger for stocks not included in the S&P 500 index and local stocks, potentially reflecting concentrated investors' successful exploitation of information asymmetries. Further, controlling for households' average investment abilities, a household's trades perform better when its portfolio includes fewer stocks. Total risks of concentrated household stock portfolios are larger and their Sharpe ratios are lower. However, because direct stock investments are only a small fraction of a typical concentrated stockowner's total net worth, concentrated stock holdings may improve the overall mean-variance tradeoff for some households.

Keywords: Portfolio Diversification; Information Asymmetry; Return to Concentration

JEL Classification: G11, G14

Suggested Citation

Ivkovich, Zoran and Sialm, Clemens and Weisbenner, Scott J., Portfolio Concentration and the Performance of Individual Investors (March 13, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=685363 or http://dx.doi.org/10.2139/ssrn.685363

Zoran Ivkovich

Michigan State University, Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall, MC-706
1206 S. Sixth Street
Champaign, IL 61820
United States
217-333-0872 (Phone)
217-244-9867 (Fax)

HOME PAGE: http://business.illinois.edu/weisbenn/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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