Researchers find smart money goes into shares

Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in.

Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month's The Journal of Finance, ignored bonds and other investments.

Economists have debated for decades what they call the participation puzzle, trying to explain why more people don't take advantage of the higher returns stocks have historically paid on savings. As few as 51 per cent of American households own them, a 2009 study by the Federal Reserve found.

Individual investors have pulled record cash out of US equity mutual funds in the last five years as shares suffered the worst bear market since the 1930s.

"It's what we see anecdotally - higher-IQ investors tend to be more willing to commit financial resources, to put skin in the game," said Jason Hsu, the chief investment officer of Research Affiliates in California. "You can generalise a whole literature on this. It seems to suggest that whatever attributes are driving people to not participate in the stock market are related to the cost of processing financial information."

Mark Grinblatt of the University of California, Matti Keloharju of Aalto University in Finland and Juhani Linnainmaa at the University of Chicago compared results from intelligence tests given by the Finnish military between 1982 and 2001 to government records showing investments the draftees later held. They found the rate of stock ownership for people with the lowest scores trailed those with the highest, even after adjusting for wealth, income, age and profession.

Three years after $US37 trillion of global share value was erased in a 16-month bear market, not everyone considers limiting equity ownership to be a mistake.

The Standard & Poor's 500 Index in the US has gained 9.8 per cent annually, including dividends, since 1926, compared with 5.7 per cent for Treasury bonds, according to a research unit of Morningstar.

But returns have dwindled to about 0.6 per cent a year since the end of 1999.

While intelligence influenced factors that might naturally increase equity ownership such as wealth and income, the authors said IQ determined who owned the most stocks within those categories as well.

Among the 10 per cent of individuals with the highest salary, "IQ significantly predicts participation" in the stockmarket, they wrote. For example, people in the highest-income ranking who scored lowest on the test had a rate of equity market participation that was 15.7 percentage points lower than those with the highest IQ.

"If you look at the significance of IQ related to other factors like income or wealth, certainly it plays a very large role," Mr Keloharju said.

American economist Harry Markowitz won a Nobel prize in 1990 for his theory that owning a larger variety of assets tended to maximise returns for a certain amount of risk. A 2009 study by the Fed found that 51.1 per cent of American families owned stocks directly or indirectly and, of those who did, 36 per cent had shares in one company.

"It's difficult to justify why someone wouldn't invest in the stockmarket, knowing what a good deal it has been," said Associate Professor Linnainmaa, a co-author of the study from the University of Chicago's Booth School of Business.