Financial Literacy and Portfolio Dynamics

Abstract

We match administrative panel data on portfolio choices with survey measures of financial literacy. We observe that, controlling for portfolio risk, most literate households experience 0.4% higher annual returns than least literate households. We then show that more literate households display distinct portfolio dynamics. They hold riskier positions when market returns are larger. They rebalance their portfolio more actively and in a way to keep their risk exposure relatively constant over time. They are more likely to buy assets which provide higher returns than the assets they sell.

Keywords: Financial Literacy, Portfolio Choices, Portfolio Returns