Market Segmentation: Evidence on the Individual Investor

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  • CFA Institute

    Market Segmentation: Evidence on the Individual InvestorAuthor(s): Ronald C. Lease, Wilbur G. Lewellen and Gary G. SchlarbaumSource: Financial Analysts Journal, Vol. 32, No. 5 (Sep. - Oct., 1976), pp. 53-60Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4477966 .Accessed: 16/06/2014 23:51

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  • by Ronald C. Lease, Wilbur G. Lewellen and Gary G. Schlarbaum

    Market Segmentation:

    Evidence on the Individual Investor

    4 Is the market for securities segmented, in the sense that different groups of investors concentrate on different groups of assets? According to the authors' examination of the demographic back- grounds, investment attitudes, and portfolio compo- sitions of a retai I broker's clients, it is.

    Respondents to the authors' questionnaire fell neatly into five demographic groups. When these groups were rated on their investment goals, the kind of information they used, and the number and kind of assets in their portfolios, a definite pattern emerged. In general, the older investor was more conservative in his investment behavior, placed less emphasis on short-term capital gains and more on dividend income, relied less on broker advice, spent more time on security analysis, and had a more di- versified portfolio containing fewer high-risk assets. The portfolios of older females were especially con- servative, diversified, and dividend-oriented.

    The respondents' brokerage transactions over the period 1964 to 1970 revealed that the composi- tions of the portfolios produced by those trades varied significantly across the five groups. Groups I (retired males), IV (older females) and V (unmarried professional and managerial persons) all held corporate securities, but Group I especially emphasized savings accounts and fixed income se- curities. Groups 11 (older employed males) and III (highly educated young professionals) were strongly invested in real estate and their own busi- nesses. More than any other, Group 11 emphasized life insurance protection.

    This evidence of market fragmentation suggests that purveyors of financial services have much to gain by being selective in their appeals to various classes of customers. When a retired male walks through the door of a brokerage office, the account executive can predict with a fair degree of

    confidence the kind of investment products that are apt to strike a responsive chord. >

    UCH of contemporary capital market theo- M ry assumes that the participants in the

    marketplace are homogenous- in the nature of their search for information, in their diges- tion of that information,, and in their consequent se- curities trading patterns. To the extent, however, that the markets for particular assets are segmented, there may be impediments to the free flow of capital that interfere with the establishment of a predictable, coherent risk-return relationship among all classes of securities. We shall offer evidence on the invest- ment behavior of the individual investor that, in general, supports the notion that segmentation does indeed exist and discuss its implications for market theory, the marketing of financial services, and the future demand for various financial assets.

    The authors are, respectively, Assistant Professor of Finance at the University of Utah, Professor of In- dustrial Administration at Purdue University, and Associate Professor of Industrial Management at Purdue. Financial support was provided by the Na- tional Bureau of Economic Research, the Investment Company Institute, the University of Utah Research Fund, the Purdue Research Foundation, the broker- age house referred to in the text, the College of Busi- ness of the University of Utah, and the Krannert Graduate School at Purdue. The authors thank Pro- fessors Frank Bass, Donald King, and Edgar Pesse- mier of Purdue, Professor Ramon Johnson of Utah, and William Albring of Purdue for their con- tribution s.

    While the article comprises a portion of a larger NBER project, it should not be considered an official NBER publication.

    FINANCIAL ANALYSTS JOURNAL / SEPTEMBER-OCTOBER 1976 O 53

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  • The literature suggests that market segmenta- tion-if it exists-can compromise the applicabili- ty of our standard risk-return pricing prescrip- tions'. Moreover, there is reason to believe that it may exist, because of both legal and institutional constraints and differences in investor tastes and expectations. We provide evidence on the latter point, concentrating explicitly on individual in- vestor participation in the market. We find that in- dividuals do appear to partition themselves into distinct groups in terms of investment strategies, objectives, information sources, and asset selection behavior and that prior treatments of the segmen- tation issue-most of which have dealt with insti- tutional investing-may, if anything, have under- estimated its magnitude.

    The Data A random sampling of some 2500 customers of a

    large national retail brokerage house provided the data for our analysis. Selected from all the cus- tomers of the firm who had maintained an open ac- count with it over the full period January 1964 through December 1970, the sample was stratified to match the geographical distribution of the gen- eral U.S. shareholder population as reported by the

    New York Stock Exchange.2 While we restricted it to individual investors-corporate, institutional and investment club accounts being excluded from consideration-no criteria of trading volume or portfolio size were imposed for eligibility. Conse- quently, the sample spans a wide range of individ- ual investment circumstances and styles.

    A questionnaire sent to these individuals in mid- 1972 requested information on demographic at- tributes as well as on a variety of aspects of invest- ment attitudes, objectives, decision processes, and portfolio compositions. They returned just under 1000 usable completed forms. These data were matched with the complete record from the brokerage firm's files of transaction activity in each account between 1964 and 1970. The latter in- cluded statistics on trading frequency, trading volume, number of different securities traded, and percentage breakdowns by particular transaction types-e.g., cash vs. margin trades, short vs. long positions, round vs. odd-lot transactions. The result is an unusually comprehensive picture of both the circumstances and market participation profiles of each individual surveyed. Table 1 por- trays certain key dimensions for the sample as a whole. Since prior analysis has shown that, in terms of demographic characteristics, the sample is highly representative of the mass of American 1. Footnotes appear at end of article.

    TABLE 1: Characteristics of the Investor Sample Age: Occupation:

    Under 21 ...... < 1% Professional/Technical .................. 27% 21-34 ...... 3% Manager/Proprietor .................. 29% 35-44 ...... 12% Clerical/Service .................. 7% 45-54 ...... 29% Craftsman/Laborer .................. 3% 55-64 ...... 26% Farm Owner/Farm Laborer .................. 2% 65 and over ....... 30% Not Employed ................... 32%

    Sex: Total Asset Holdings:

    Male...........80% Under $100,000 . 27% Female .2 0% $100,000-199,999 ........... 30%

    $200,000-299,999 ........... 15% Family Income: $300,000-399,999 . 8%

    $400,000 and over . 20% Under $5,000 ......................... 2% $5,000-9,999 .......................... 8% Common Stock Holdings: $10,000-14,999 ........... 15% Under $50,000 ............ 51% $15,000-19,999 ........... 13% $50,000-99,999 ............ 18% $20,000-24,999 ........... 18% $100,000-149,999 ............ 10% $25,000-49,999 ........... 26% $150,000-199,999 ............ 7% $50,000 and over ........... 18% $200,000 and over ............ 14%

    Education: Annual Trading Volume:

    Less than H.S ........... 11% Under $5,000 ........... 29% H.S. Graduate ........... 12% $5,000-9,999 ........... 18% Some College ........... 23% $10,000-14,999 ........... 11% BA/BS ........... 31% $15,000-24,999 ........... 12% Graduate Degree ........... 23% $25,000 and over ........... 30%

    54 O FINANCIAL ANALYSTS JOURNAL / SEPTEMBER-OCTOBER 1976

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  • shareholders, it seems reasonable to extrapolate its observed behavior patterns to that larger popula- tion.3 Partitioning the Sample

    A standard cluster-analysis procedure sorted the sample along self-defined "natural" de

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