Ulric B. and Evelyn L. Bray Seminar

The overall equity allocation of the individual investors examined in the paper – a representative sample of 40,000 self-directed clients at one of the three largest German retail banks - remains stable between 2007 and 2011. In contrast, the investors' tendency to delegate their equity investments to mutual fund managers markedly drops during the 2008 crisis and never recovers. Passive stock funds and stock funds not affiliated with large financial institutions perform better in terms of fund flows, but much of the money previously allocated to active funds is directed towards individual stocks. Investors in active funds are also more likely to reduce their overall equity exposure or outright exit the stock market during the crisis, despite strong tax incentives to remain invested in equities.  The financial crisis of 2008 appears to have disrupted a long and robust trend towards more delegated equity investing in non-retirement accounts. The paper's results point to a loss of trust in financial intermediation prompting some investors to abandon the stock market altogether and the remaining investors to take on more idiosyncratic risk, on average.