Portfolio Inertia and Stock Market Fluctuations
46 Pages Posted: 2 Jun 2006 Last revised: 30 Sep 2009
Date Written: September 23, 2009
Existing studies of household stock trading using administrative data offer conflicting results: discount brokerage accounts exhibit excessive trading, while retirement accounts show inactivity. This paper uses population-wide data from PSID and SCF to examine the overall extent of household portfolio inertia in participation and trading and its link to household characteristics and stock market movements. We document considerable portfolio inertia, linked to characteristics (e.g. low education or limited resources), but less so to index movements. The downswing seems to have encouraged staying out, rather than getting out of the market. We find important differences in trading patterns of the small minority with brokerage accounts relative to the population; and small fractions of owners’ wealth in those accounts. Our findings strengthen the case for default options in retirement accounts and for funds with built-in trading provisions. While households did not overreact to the downswing through massive sales or exits, this seems more a manifestation of widespread inertia than of optimal response to stock market fluctuations.
Keywords: Stockholding, Portfolio inertia, stock trading, household portfolios
JEL Classification: G11, E21
Suggested Citation: Suggested Citation