The Portfolio Management Problem of Individual Investors: A Quantitative Perspective

SUMMER 2004 O ver the past 30 to 40 years, a generally accepted approach has evolved for the management of institutional investment funds. Today we see an effort to adapt this approach to managing the funds of individual investors. The impetus behind this initiative is surely a laudable one—to improve the investment experience and outcomes of individuals by adapting the best practices validated in the institutional setting. However, there are difficulties, as the investment problems of institutions and individuals differ in some fundamental ways. Until institutional methods are suitably modified to account for these differences, the experience of individual investors is likely to remain less than it could be. This article identifies some of these key differences and suggests appropriate adaptations of institutional methods to suit individual investors.