The sorry state of retail investor portfolios

We all know that institutional investors have more diversified portfolios than retail investors, but two studies shed light on just how poorly diversified the average retail portfolio really is.

The first study I came across was done by Ines Chaib from the University of Geneva and two collaborators. They built a comprehensive global database of share ownership. There is tons of interesting information in that study but I want to focus on a couple of findings regarding retail portfolios.

First, I was surprised how large the share of retail ownership is even in this day and age of fund investing. Even in 2020, most developed countries show a retail share of ownership close to 50% of the stock market. Note that this excludes ownership of stocks via mutual funds which are counted as institutional ownership. In some countries like the US, the UK, and Australia, retail investors holding stocks outright are much more important than others (e.g. Spain and Portugal). But no matter the exact share of retail investors, in every country they are the most important group of owners by volume.

Firm ownership by investor type

Source: Chaieb et al. (2024).

Unfortunately, with so much direct ownership of stocks come a lot of bad habits. First, retail investors remain incredibly home-biased. Typically, retail investors invest 85% or more of their stock investments in domestic shares. One may argue that retail investors get their international diversification through fund investments, but if direct investment account for some 40% of total firm ownership and some 90% of that are domestic shares, then this implies that retail investors typically hold about 30% to 40% of their portfolio in single domestic stocks. That still is a huge home bias and a lack of diversification.

Home bias of retail investors

Source: Chaieb et al. (2024)

Which brings me to the second study, done by the VZ Vermögenszentrum in Switzerland based on portfolios of Swiss investors.

One result that stood out to me was the number of individual positions held in portfolios. On average, Swiss retail investors held six to seven actively managed funds, three ETFs, two index funds and seven single stocks. The problem just is that these seven single stocks account for 36.6% of the portfolio.

Average number of positions in Swiss retail portfolios

Source: VZ Vermögenszentrum

Meanwhile, the rest of the portfolio consists of funds and structured products issued by different institutions. Or rather by one institution. You see, in Switzerland, the regulator changed the rules some time ago. Since 2012, customers in Switzerland have the right to demand all sales commissions from third party funds to be paid out to them. I have written here how that changed the advice given by banks from an open architecture that recommends the ‘best fund’ anywhere to a house-based architecture where products issued by the bank are preferred. This has become extreme in recent years with about two thirds of the products in a Swiss retail portfolio issued by the investors house bank.

Share of customer’s own bank’s products

Source: VZ Vermögenszentrum

This is clearly a situation that is less extreme outside of Switzerland but since most retail investors get their advice from a financial adviser or a house bank that is at least somewhat biased, I fear there is also a ‘house bias’ in other countries.

In short, retail investor portfolios are not very well diversified both in terms of countries as well as asset managers and often highly concentrated in a few stocks that drive most of the performance. Essentially, retail investors pretend they are great stock pickers and let their stock picking skills dominate their lifetime investment outcomes.