Barking Up The Wrong Tree: Return-chasing in Mutual Funds
47 Pages Posted: 5 Jan 2020 Last revised: 11 Jan 2020
Date Written: November 16, 2019
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: Suggested Citation