Whose Money is Smart? Mutual Fund Purchases of Private Investors

This paper contributes to the growing body of literature on mutual fund purchasing decisions, smart investment decision making and household finance. By using administrative data allowing for an empirical analysis on investor-specific level we derive three key findings. First, it is shown that lacking investor sophistication is the dominant driver preventing investors from chasing historical performance. Second, we find that smart investment decisions are made by investors that are older, more experienced, wealthier and less overconfident. Financial advice only improves fund selection if initial charges are not taken into account. Third, evidence on the economic impact of smart decision making is provided, pointing out that smart investor realizes an on average 127bp higher portfolio return per year.