Individual investor underperformance describes the tendency for retail traders to lose money relative to institutional investors through their trading activity. Barber, Lee, Liu, and Odean (2009) authored "Just How Much Do Individual Investors Lose by Trading?" using Taiwan Stock Exchange data. The study covered 3.9 million individual investors from January 1995 through December 1999 and found individual investors' aggregate portfolio lost 3.8 percentage points annually. Institutions earned an annual performance boost of 1.5 percentage points over the same period. Virtually all of the individual investors' losses were traced to their aggressive, rather than passive, orders.
What the Study Found
Individual investors in Taiwan lost $NT 935 billion ($US 32 billion) from trading between 1995 and 1999. Annual losses averaged $NT 187 billion ($US 6.4 billion), equal to 2.2% of Taiwan's GDP and 2.8% of total personal income. The losses break down into trading losses (27%), commissions (32%), transaction taxes (34%), and market-timing losses (7%). Sixty-four percent of all trades emanated from aggressive orders, and virtually all individual losses traced to aggressive rather than passive trades. Institutions earned average daily profits of $NT 126.3 million net of transaction costs, and foreign investors captured 46.2% of institutional trading and market-timing profits.
Methodology
The dataset comprises the complete transaction history and underlying order records for every trader on the Taiwan Stock Exchange. The sample includes approximately 3.9 million individual investors, 24,000 corporations, 83 dealers, 1,600 foreigners, and 289 mutual funds. The data span January 1, 1995, through December 31, 1999. Monthly abnormal returns are estimated using a four-factor model controlling for market, size, value, and momentum factors.
Key Statistics
| Metric | Finding | Context |
|---|---|---|
| Individual investor annual performance penalty | 3.8 percentage points | Aggregate individual portfolio, full sample: 1995–1999 |
| Institutional annual performance boost | 1.5 percentage points | Aggregate institutional portfolio, net of commissions and taxes, 1995–1999 |
| Total individual investor trading losses | $NT 935 billion ($US 32 billion) | Full sample: 1995–1999 |
| Individual losses as share of Taiwan GDP | 2.2% | Full sample: 1995–1999 |
| Share of all trades from aggressive orders | 64% | All trades, full sample: 1995–1999 |
| Four-factor model | R_corp,t − R_ft = α_j + β_j(R_mt − R_ft) + s_j·SMB_t + h_j·HML_t + w_j·WML_t + ε_jt | Used to estimate monthly abnormal returns on each group's buy/sell portfolios |
Why This Matters
Active trading appears to be a costly strategy for retail investors relative to a passive buy-and-hold approach. Because losses are concentrated in aggressive, liquidity-demanding orders, the pattern fits overconfident investors trading as if they possess private information they lack. Individual investors saving for long-term goals, such as retirement, could improve outcomes by trading less frequently or investing in low-cost diversified funds instead. Policymakers designing personal retirement savings systems should weigh the risk that untrained individual investors erode their own returns through active trading.