All Guts, No Glory: Trading and Diversification among Online Investors


  • Financial support from Jan Wallanders och Tom Hedelius Stiftelse is gratefully acknowledged. I thank the editor Harrison Hong, Magnus Dahlquist, Paul Söderlind, Peter Englund, Marcus Glaser, Mattias Nilsson, Tim van Tongeren, Martin Weber, seminar participants at Stockholm Institute for Financial Research (SIFR), University of Mannheim, Lund University, and an anonymous referee for helpful comments. Finally, I am grateful to the online broker who wishes to remain anonymous, and Finansinspektionen who provided me with the data.


I explore cross-sectional portfolio performance in a sample containing 324,736 transactions conducted by 16,831 Swedish investors at an Internet discount brokerage firm during the period May 1999 to March 2002. On average, investors hold undiversified portfolios, show a strong preference for risk, and trade aggressively. I measure performance using a panel data model, and explain the cross-sectional variation using investors' turnover, portfolio size and degree of diversification. I find that turnover is harmful to performance due to fees, and is therefore more predominant among investors with small portfolios. I argue that the degree of diversification is a proxy for investor skill, and it has a separate and distinct positive effect on performance. Investors underperform the market by about 8.5% per year on average, of which half can be attributed to trading costs.