Do retail investors bite off more than they can chew? A close look at their return objectives

Abstract

Using information self-reported by retail investors in a risk-return profiling survey, we investigate the determinants of individual return objectives as well as the capacity of investors to reach them. Controlling for a large set of covariates, we provide empirical evidence that return objectives are related to subjective individual characteristics (such as financial literacy and risk tolerance), some sociodemographics (age, education), as well as recent past trading intensity. Retail investors with higher return objectives perform better, compared to their counterparts who want to avoid any risk of capital loss. The capacity to reach the return objective however decreases as the level of return objectives increases.

Banks retail clients' profiles and the gender gap in subjective financial literacy of spouses

“…Finally, D'Hondt, De Winne, and Merli (2021) showed that MiFID questionnaire answers provide useful information about retail investors return objectives. In fact, in the MiFID questionnaire of the second dataset, retail investors must self‐report their expected portfolios return.…”

“…Using past and actual investor stock portfolio returns, this paper investigates the determinants of individual return objectives as well as the capacity of investors to achieve them. D'Hondt, De Winne, and Merli (2021) found that return objectives are related to individual characteristics, such as subjective financial literacy and risk tolerance, sociodemographics and recent past trading intensity.…”

“…In the second dataset, as data on trading behavior of investors is also available, some of the self‐reported individual characteristics available in the MiFID questionnaires are shown to be helpful for identifying investors regarding (i) their financial sophistication (Bellofatto et al, 2018; Bellofatto et al, 2021), or (ii) their stock portfolio exposure to Environmental, Social and corporate Governance (ESG) factors (D'Hondt, Merli, & Roger, 2022), or predicting, (iii) investor sentiment (D'Hondt & Roger, 2017), or (iv) their future returns (D'Hondt, De Winne, & Merli, 2021).…”

“…We present the findings of a series of papers that examine retail clients' MIFID questionnaires answers and their banking or trading records over time. We show that retail clients' profiles help in understanding stock market participation by retail investors (Broihanne & Orkut, 2022) and financial goals setting (Broihanne & Orkut, 2018) but also that the profiles aid in identifying the more sophisticated investors (Bellofatto et al, 2018; Bellofatto et al, 2021), environmental, social and corporate governance (ESG) exposure (D'Hondt, Merli, & Roger, 2022) and predicting investor sentiment (D'Hondt & Roger, 2017) and their future returns (D'Hondt, De Winne, & Merli, 2021).…”

“…3 3 Subjective financial literacy has recently been addressed by Bianchi (2018), Bellofatto et al (2018), and D'Hondt et al (2021a). Bucher‐Koenen et al (2017) show that the gender‐gap is observed both in objective and subjective (self‐reported) financial literacy. …”