Portfolio Inertia and Stock Market Fluctuations


  • We are grateful to Luc Arrondel, Martin Browning, Chris Carroll, Dimitris Christelis, Arie Kapteyn, Arthur Kennickell, Donna Nordquist, Victor Rios Rull, Tullio Jappelli, and especially Deborah Lucas (the editor), James Smith, Nick Souleles, Luis Viceira, and two anonymous referees for very helpful comments and suggestions. We also thank participants in the NBER Summer Institute (Group on Capital Markets), the CAM conference in Copenhagen, and the XIII Conference of the Spanish Finance Association, as well as seminar participants at the ECB, Bundesbank, and the University of Piraeus. This work has been supported in part by the European Community's Human Potential Program under contract HPRN-CT-2002-00235 [AGE], and by the Center for Financial Studies under Research Program “Household Wealth Management.”


This paper uses population-wide data from the Panel Study of Income Dynamics and the Survey of Consumer Finances to resolve the conflict between overtrading and inactivity shown in administrative data on brokerage and retirement accounts, respectively. Considerable inertia is found and linked to characteristics (e.g., limited education or resources), but less to index movements: the downswing has encouraged staying out, rather than getting out, of the market. The small minority with brokerage accounts exhibits important differences in trading patterns relative to the population and invests small fractions of wealth in brokerage accounts. Results strengthen the case for default options in retirement accounts and built-in trading provisions in mutual funds.