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Financial Literacy, Portfolio Choice and Financial Well-Being

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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.

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Acknowledgments

The authors acknowledge funding support from the National Natural Science Foundation of China (71232003 and 71573147), Specialized Research Fund for the Doctoral Program of Higher Education (20120002110085) and China Postdoctoral Science Foundation (2015M570066). The authors would also like to thank Hong Zhang and Bibo Liu for their comments and suggestions.

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Authors and Affiliations

  1. PBC School of Finance, Tsinghua University, Beijing, 100083, People’s Republic of China

    Zhong Chu, Zhengwei Wang & Weiqiang Zhang

  2. Department of Human Development and Family Studies, University of Rhode Island, Transition Center, 2 Lower College Road, Kingston, RI, 02881, USA

    Jing Jian Xiao

Authors
  1. Zhong Chu
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  2. Zhengwei Wang
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  3. Jing Jian Xiao
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Correspondence to Zhong Chu.

Appendix: Financial Literacy Questions in 2014 Chinese Survey of Consumer Finance

Appendix: Financial Literacy Questions in 2014 Chinese Survey of Consumer Finance

The survey was conducted in Chinese. Questions are designed according to financial literacy questions in OECD consumer finance survey (Atkinson and Messy 2012) and Survey of Consumer Finances (SCF) in the US. In this study, except for question 7, the questions are all come from the OECD consumer finance survey and Survey of Consumer Finances (SCF), only names and the numbers are changed. Question 7 is developed by the research team of China Center for Financial Economic.

  1. 1.

    One-year deposit interest rate: What is your estimation of one-year deposit interest rate?

    (1) Below 1 % (2) 1–5 % (3) 5–10 % (4) 10 % and above (9) Do not know

  1. 2.

    Interest calculation: If you save 10,000 yuan in the bank for 1 year and the annual saving rate is 3 %, how much will get after one year?

    (1) 10,300 (2) more than 10,300 (3) less than 10,300 (9) Do not know

  1. 3.

    Interest compounding: In the last question, if you continue saving the total amount you get for another year, how much will you get?

    (1) 10,600 (2) more than 10,600 (3) less than 10,600 (9) Do not know

  1. 4.

    Inflation: If the annual saving interest rate is 3 %, and the inflation rate is 5 %. After 1 year, using the same amount of money, you will buy:

    (1) more things than now (2) equal things with now (3) less things than now (9) Do not know

  1. 5.

    Time value of money: If Zhang inherits 100,000 yuan today, and Li will inherit 100,000 yuan after 3 years, who get more value from the inheritance?

    (1) Zhang (2) Li (3) They get the same value (9) Do not know

  1. 6.

    Investment risk: Usually high return investment also have high risk.

    (1) Right (2) Wrong (9) Do not know

  1. 7.

    Central bank: Which bank has the currency policy making function?

    (1) Bank of China (2) Industry and Commerce Bank of China (3) People’s Bank of China (4) China Construction Bank (9) Do not know

  1. 8.

    The risk of stock: Generally speaking, invest in one stock is less risky than invest in Equity funds.

    (1) Right (2) Wrong (9) Do not know

  1. 9.

    The risk comparison: Generally speaking, which of the following asset is most risky?

    (1) Bank saving (2) Treasury bond (3) Stock (4) Mutual fund (9) Do not know

  1. 10.

    The meaning of holding stocks: What does it mean if you buy stocks of a particular company?

    (1) No matter you hold the stock for a long term or a short term, you lend your money to the company

    (2) No matter you hold the stock for a long term or a short term, you are the shareholder of the company

    (3) You are shareholder when you hold for a long term, while you are only lenders if you only hold for a short while.

    (4) All above are not right.

    (9) Do not know

  1. 11.

    Mutual fund: Which of the following statement correctly describe mutual fund?

    (1) Mutual fund with lower net worth will get higher performance in the future

    (2) Generally speaking, a mutual fund could invest in several kinds of assets, such as stock and bonds

    (3) Generally speaking, mutual fund can promise you a positive return base on past performance

    (4) All above are not right.

    (9) Do not know

  1. 12.

    Stock market: Which of the following statements correctly describe the core function of stock market?

    (1) Stock market helps predict stock return

    (2) Stock market helps increase stock price

    (3) Stock market helps buyers and sellers of stocks

    (4) All above are not right.

    (9) Do not know

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Chu, Z., Wang, Z., Xiao, J.J. et al. Financial Literacy, Portfolio Choice and Financial Well-Being. Soc Indic Res 132, 799–820 (2017). https://doi.org/10.1007/s11205-016-1309-2

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