Barking Up The Wrong Tree: Return-chasing in Mutual Funds

47 Pages Posted: 5 Jan 2020 Last revised: 11 Jan 2020

See all articles by Anh Tran

Anh Tran

University of Connecticut

Pingle Wang

University of Rochester, Simon Business School

Date Written: November 16, 2019

Abstract

This paper examines how investors allocate their savings at the micro-level. Using a hand-collected dataset consisting of firm-level investment decisions of employees in 401(k) plans, we characterize the return-chasing behavior of the median investor and demonstrate a lack of financial literacy among investors in the retirement market. Specifically, we show that only 17% of the population with a high level of financial sophistication hold 61% of the wealth and invest based on the CAPM alpha, whereas 83% of the population chase unadjusted returns and leave substantial money on the table.

Keywords: Mutual funds, defined contribution, fund flows, wealth inequality, financial literacy, 401(k)

JEL Classification: D14, G11, G12, G23, J20, J26

Suggested Citation

Tran, Anh and Wang, Pingle, Barking Up The Wrong Tree: Return-chasing in Mutual Funds (November 16, 2019). Available at SSRN: https://ssrn.com/abstract=3502862 or http://dx.doi.org/10.2139/ssrn.3502862

Anh Tran

University of Connecticut ( email )

CT
United States

Pingle Wang (Contact Author)

University of Rochester, Simon Business School ( email )

Rochester, NY
United States

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