Fight or Flight? Portfolio Rebalancing by Individual Investors

Laurent E. Calvet, John Y. Campbell, Paolo Sodini

NBER Working Paper No. 14177
Issued in July 2008
NBER Program(s):Asset Pricing

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 find 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.

download in pdf format
   (2690 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14177

Published: Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight Or Flight? Portfolio Rebalancing by Individual Investors-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 301-348, February. citation courtesy of

Users who downloaded this paper also downloaded* these:
Calvet, Campbell, and Sodini w12030 Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
Hau and Rey w10476 Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?
Hau and Rey w14165 Global Portfolio Rebalancing Under the Microscope
Calvet, Campbell, and Sodini w14699 Measuring the Financial Sophistication of Households
Brown, Liang, and Weisbenner w13169 Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(k) Plans
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us