Financial Literacy, Portfolio Choice and Financial Well-Being

Abstract

This study examined potential effects of financial literacy on household portfolio choice and investment return, an indicator of financial wellbeing. Using data from the 2014 Chinese Survey of Consumer Finance, financial literacy was measured and further categorized into basic financial literacy and advanced financial literacy. This study tested the hypothesis that financial literacy affects household choice between stock and mutual fund. The results indicated that households with higher financial literacy, especially those with higher level of advanced financial literacy tended to delegate at least part of their portfolio to experts and invest in mutual fund. However, households who were overconfident about their financial literacy tended to invest by themselves and were more likely to hold only stocks in their portfolios. The findings also indicated that households with higher financial literacy had a better chance of receiving a positive investment return, suggesting that higher financial literacy may result in a better financial outcome.

Financial Literacy, Behavioral Biases and Investor's Portfolio Diversification: Empirical Study of an Emerging Stock Market

“…Normally they rely on their confidence and make their investment. Even financial literate investors also do not thinking about their portfolio diversification, our results strongly support the findings of Chu et al (2016) who scrutinized that financial literate investor don't tend to invest in portfolio diversification, however overconfidence significantly diversify their portfolio. In addition, our study supports the findings of Zia, Ilyas Sindhu, and Haider Hashmi (2017) that overconfidence bias has significant influence on investor trading in Pakistan stock market.…”

“…Financial information and education boost and make confidence in investors for good financial management decision. Chu et al (2016) scrutinized that individuals with higher financial literacy prefer to invest in mutual fund and intend positive investment return while overconfident financial literate individuals like to hold stocks in portfolio. Gaudecker and Von (2015) illustrated, that the largest loss from under-diversification happened to those investors who neither take help from others nor have their own financial understanding.…”

“…In addition, Aren and Aydemir (2015) explicated that investment decisions can be affected by several demographic factors, such as age, gender, marital status. Many researchers have scrutinized that financial literacy influences investor's portfolio diversification (Mouna & Jarboui, 2015;Letkiewicz & Fox, 2014;Chu, Wang, Xiao, & Zhang, 2016). For instance, Zhang (2014) and Mian (2014) scrutinized that financial literate individuals are more likely to participate in financial market because they have more information about stock markets.…”

Financial Knowledge and Household Saving: Evidence from the Survey of Consumer Finances

“…Approximately 43% of households answered three financial knowledge questions correctly, while 68% reported that their financial knowledge was 7 or above, which implies that perceived knowledge is somewhat overestimated. Previous studies found that overconfident households are more likely to invest with underdiversification (Chu, Wang, Wang, & Zhang, ) and more likely to utilize alternative financial services (Robb, Babiarz, Woodyard, & Seay, ). Future research should conduct additional analyses on some of the disparities between objective and perceived financial knowledge (i.e., the relationship between overconfidence in financial knowledge and saving behavior).…”

Mental accounting and behavioural hierarchy: Understanding consumer budgeting behaviour

“…If budgeting is an indicator of financial capability, it should be correlated with other financial capability variables such as financial literacy and other financial behaviours. Previous research shows that financial literacy correlated with positive financial behaviours such as stock participation(Chu, Wang, Xiao, & Zhang, 2016;Van Rooij, Lusardi, & Alessie, 2011) and budgeting behaviour is positively associated with other…”