How does household portfolio diversification vary with financial literacy and advice?

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 either score high on financial literacy; or rely on professionals or private contacts for advice; achieve reasonableinvestment outcomes. Compared to these groups, households with below-median financial literacy that trust their own decision-making capabilities, lose an expected 50bp on average. All group differences stem from the top of the loss distribution.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.


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