Fight or Flight: How stock market crashes affect private investors’ portfolio diversification in Sweden

Abstract: Background: Stock ownership has been increasing in Sweden, with 2,7 million individual owners in 2022, up from 2,1 million in 2018. A trend shows that younger individuals are becoming more involved in stock ownership, while those over 40 are decreasing in numbers. Traditional finance theories, such as neoclassical finance, assume rational decision-making and advocate for diversified portfolios, but behavioral finance acknowledges the impact of psychological factors and biases on investment decisions. Evidence suggests that households tend to reduce diversification levels during stock market crashes, which may be influenced by demographic factors.   Purpose: The aim is to investigate whether the Covid-19 stock market crash influenced the portfolio allocation and asset preferences of Swedish private investors. Specifically, we examine whether there were changes in diversification levels and whether demographic factors such as gender, age, education, and portfolio wealth impacted investment behavior. The research seeks to provide a comprehensive understanding of how Swedish private investors responded to the stock market crash.   Method: We adopt a deductive approach, rooted in the positivistic philosophy. The data for our research was collected through a quantitative survey involving 232 participants. However, only 127 were used for the data analysis. Building upon prior research, seven alternative hypotheses were formulated and examined using the binary logistic model with the statistical tool SPSS and STATA.   Conclusion: Findings from this study show that 30% of participants reported an increased diversification in response to the Covid-19 stock market crash. The only demographic factor that had a significant impact on investors’ likeliness to alter their diversification levels were gender. Women were found to be more likely to increase their diversification levels in response to a stock market crash than men. There has been a shift in asset allocation preferences, with a growing preference for safer options such as mutual funds and ETFs, and a decrease in riskier assets such as stocks. However, we do not find any flight to liquidity.