Fight or Flight? Portfolio Rebalancing by Individual Investors

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Fight or Flight? Portfolio Rebalancing by Individual Investors

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Title: Fight or Flight? Portfolio Rebalancing by Individual Investors
Author: Campbell, John; Calvert, Lauren E.; Sodini, Paolo

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Citation: Calvert, Lauren E., John Y. Campbell, and Paolo Sodini. Forthcoming. Fight or flight? Portfolio rebalancing by individual investors. Quarterly Journal of Economics. 124(1).
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Abstract: This paper investigates the dynamics of individual portfolios in a unique dataset
containing the disaggregated wealth of all households in Sweden. Between 1999
and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios
tend to rebalance more actively. We found some evidence that households rebalance
towards a higher risky share as they become richer. We also study the decisions to
trade individual assets. Households are more likely to fully sell directly held stocks
if those stocks have performed well, and more likely to exit direct stockholding if
their stock portfolios have performed well; but these relationships are much weaker
for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual
fund investors. When households continue to hold individual assets, however, they
rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting
purchases of risky assets if their risky portfolios have performed poorly, and by
adjusting both fund purchases and full sales of stocks if their risky portfolios have
performed well. Finally, the tendency for households to fully sell winning stocks is
weaker for wealthy investors with diversified portfolios of individual stocks.
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