Financial Literacy and Multi-Asset Portfolio Diversification

This paper investigates the relationship between financial literacy and portfolio diversification. We rely on a dataset including both the trading records of more than 24,000 retail investors and their answers to questionnaires that provide information regarding financial literacy and other personal characteristics. Since the trading records are not limited to stocks, we assess portfolio diversification based on different asset classes (bonds, funds, options, warrants) and show that this leads to a significant diversification improvement. We find a strong and robust relationship between financial literacy and portfolio diversification, regardless of the financial literacy score and the diversification measure that are used. The relevance of relying on a data-consuming approach for accurate diversification measurement is also discussed and seems not crucial.