How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?
Abstract
Household investment mistakes are an important concern for researchers and policymakers alike. Portfolio underdiversification ranks among those mistakes that are potentially most costly. However, its roots and empirical importance are poorly understood. I estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables. Nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes. Compared to these groups, households with below‐median financial literacy that trust their own decision‐making capabilities lose an expected 50 bps on average. All group differences stem from the top of the loss distribution.
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Overconfidence reduces individuals' propensity to demand professional financial advice.
“Finally, Kramer (2014) and von Gaudecker (2015) compare individuals' test-based financial literacy levels with how financially literate they perceive themselves and suggest a role for overconfidence which reduces individuals' propensity to demand professional financial advice”
From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as von Gaudecker (2015)
U.S. retail investors with higher financial sophistication are more likely to hold well-diversified portfolios.
“Likewise, Clark et al. (2015) document a positive correlation between financial sophistication and excess stock returns among U.S. individuals, while von Gaudecker (2015) finds that this group of retail investors is more likely to hold welldiversified portfolios.”
From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as von Gaudecker (2015)
Most losses from insufficient diversification are spotted among overconfident investors, who are neither financially literate nor consult with financial advisors.
“However, most losses from insufficient diversification are spotted among overconfident investors, which neither are financially literate nor consult with financial advisors.”
From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as von Gaudecker 2015
Cites
Financial literacy and stock market participation
van Rooij, M., Lusardi, A., & Alessie, R. (2011) · Journal of Financial Economics · doi:10.1016/j.jfineco.2011.03.006 · Cited by 3,554 · cited 9× · see citing works
“…to thank CentERdata for help on numerous data questions; Mauro Mastrogiacomo for passing on code to prepare the DHS data; and Maarten van Rooij, Annamaria Lusardi, and Rob Alessie for providing the data and code used to construct the financial literacy scores in Rooij, Lusardi, and Alessie (2011).”
InfluentialEquity Portfolio Diversification
Goetzmann, W. N., & Kumar, A. (2008) · Review of Finance · doi:10.1093/rof/rfn005 · Cited by 1,222 · see citing works
Do Portfolio Distortions Reflect Superior Information or Psychological Biases?
Korniotis, G. M., & Kumar, A. (2013) · Journal of Financial and Quantitative Analysis · doi:10.1017/s0022109012000610 · Cited by 166 · see citing works
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Optimal Financial Knowledge and Wealth Inequality
Lusardi, A., Michaud, P.-C., & Mitchell, O. S. (2017) · Journal of Political Economy · doi:10.1086/690950 · Cited by 690 · see citing works
Financial literacy, financial advice, and financial behavior
Stolper, O. A., & Walter, A. (2017) · Journal of Business Economics · doi:10.1007/s11573-017-0853-9 · Cited by 471 · see citing works
“…link between financial literacy and portfolio diversification: highly literate investors tend to manage their risks significantly better than the group of low literate individuals (e.g., Calvet et al. 2007; Goetzmann and Kumar 2008; Guiso and Jappelli 2008; von Gaudecker 2015; Clark et al. 2015).”
BackgroundInfluentialInternational Comparative Household Finance
Badarinza, C., Campbell, J. Y., & Ramadorai, T. (2016) · Annual Review of Economics · doi:10.1146/annurev-economics-080315-015425 · Cited by 218 · see citing works
- Authors
- GAUDECKER, H. V.
- Affiliations
- University of Bonn (DE)
- Corresponding author
- GAUDECKER, HANS‐MARTIN VON
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2015-03-12
- Volume
- 70
- Issue
- 2
- Pages
- 489-507
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2115540370
- Cited by
- 596
- References
- 3
- Citations by year
- 2026: 52 · 2025: 58 · 2024: 75 · 2023: 65 · 2022: 49 · 2021: 70 · 2020: 62 · 2019: 47 · 2018: 29 · 2017: 33 · 2016: 30 · 2015: 18 · 2014: 2 · 2013: 1 · 2012: 5
- FWCI
- 117.59
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- The Journal of Finance (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy and Behavior
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Keywords
- financial literacy, financial advice, investment returns
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