Portfolio Diversification during Calm and Volatile Markets

In this article we examine changes in the diversification of individual investors' portfolios in response to two extreme events, the 2008 Financial Crisis and the COVID-19 pandemic. The analysis is based on a long-standing asset allocation survey performed by the American Association of Individual Investors. The results show that this group of individual investors significantly changed their allocations to stocks, bonds, and cash before the crisis, and those changes resulted in a more diversified portfolio during the 2008 crisis. To the contrary, to weather the pandemic, investors did not change their portfolios in any significant way, and held a less diversified portfolio than the one they held during the financial crisis.