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

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  • von Gaudecker, Hans-Martin

    ()
    (Munich Center for the Economics of Aging (MEA))

Abstract

Economic theory suggests that households should invest their financial wealth in a combination of cash and a well-diversified equity portfolio. Yet, many households' equity investments are strongly concentrated in a few assets. Attempts to explain this discrepancy have included low levels of cognitive skills and/or financial knowledge; and poor or misguided financial advice. In order to investigate these claims empirically, I construct detailed portfolios for the respondents to a Dutch household survey. The data allow me to estimate the portfolios' risk-return properties without resorting to assumptions about characteristics of specific asset classes. Controlling for a large number of covariates, my results show that the combination of low numerical-financial skills and not seeking advice from other persons is strongly associated with the largest losses from underdiversification, whereas financial knowledge does not seem to have much of an effect.

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Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 11238.

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Date of creation: 22 Mar 2011
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Handle: RePEc:mea:meawpa:11238

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Cited by:
  1. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.

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