The Volatility of Stock Investor Returns

The volatility of investor returns depends not only on the volatility of the stocks investors hold but also on their time-varying capital exposure to these holdings. We measure investor returns as dollar-weighted returns (IRRs), and provide comprehensive evidence on the volatility of investor returns using individual stocks, portfolios of stocks, and market indexes from the U.S. and major international stock markets. Our main finding is that the volatility of investor returns is higher than the corresponding volatility of stock returns in nearly all specifications. The relative magnitude of the volatility differential varies from as little as 10% and up to 75%, where this differential tends to increase with investment horizon. Probing into the drivers of this volatility differential reveals that investors tend to "chase stability" but have bad timing, adding capital to stocks after low past volatility but before high future volatility. Overall, taken together with existing evidence that investor returns tend to be lower than corresponding stock returns, this study suggests that the risk-return trade-off for stock investors is worse than previously thought.