Session Topic: Individual Investors and Mutual Funds



  • We are grateful to Wells Fargo Bank for supporting much of the research discussed in this paper, and for permission to write a paper describing their work on the development of financial products based on this research. We are grateful to John A. McQuown and David G. Booth for comments on an earlier draft.


Summary. The modern theory of finance suggests that most investors should put part or all of their money into a “market portfolio” mixed with borrowing or lending. Empirical evidence generally supports the theory, but there are some unanswered questions about the composition of the best market portfolio, about the apparent attractiveness of low risk stocks relative to high risk stocks, and about ways of minimizing transaction costs. Attempts to create a fund based on these principles and to make it available to a large number of investors have uncovered some important problems. Legal costs due to government regulation, the costs of managing a fund, and especially the costs of selling it are all much higher than one might expect. Despite these problems, efforts to create such funds seem destined for eventual success.