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Financial diversification strategies before World War I: Buy-and-hold versus naïve portfolio selection

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  • Dimitris P. Sotiropoulos
  • Janette Rutterford

Abstract

This study contributes to a growing volume of scholarship that highlights the importance of financial diversification in business history. It shows that, pre-WWI, financial advice for equal portfolio weighting, the so-called naïve diversification, then called scientific investment or geographical distribution of risk, was a sophisticated strategy for Victorian investors and not suboptimal to Markowitz optimization. Drawing upon a unique dataset of 507 individual portfolios at death, this study shows that, although Victorian investors, in particular wealthy investors, did diversify investment risk across a number of securities, they did not hold equally weighted portfolios. It explores possible reasons for the unbalanced nature of investor portfolios and dismisses socio economic factors, illiquidity, passive ‘buy the market’ and market timing strategies as possible explanatory factors. The results rather point to a strategy of naïve diversification spread over time, a ‘buy as you go and hold strategy’, buying new securities as savings allowed and holding them until death.

Suggested Citation

  • Dimitris P. Sotiropoulos & Janette Rutterford, 2019. "Financial diversification strategies before World War I: Buy-and-hold versus naïve portfolio selection," Business History, Taylor & Francis Journals, vol. 61(7), pages 1175-1198, October.
  • Handle: RePEc:taf:bushst:v:61:y:2019:i:7:p:1175-1198
    DOI: 10.1080/00076791.2018.1512097
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    Cited by:

    1. Xi Zhang & Xu Wu & Linlin Zhang & Zhonglu Chen, 2022. "The Evaluation of Mean-Detrended Cross-Correlation Analysis Portfolio Strategy for Multiple risk Assets," Evaluation Review, , vol. 46(2), pages 138-164, April.
    2. Maxime MERLI & Antoine PARENT, 2022. "Portfolio Diversification During the Belle Époque: When the Actual Portfolios of French Individual Investors Met Behavioral Finance," Working Papers of LaRGE Research Center 2022-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

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