Financial literacy and portfolio diversification: an observation from the Tunisian stock market

Purpose – The purpose of this paper is to focus on the lack of financial literacy as one probable factor explaining the low levels of portfolio diversification. The authors consider distinct aspects of financial literacy and control for socioeconomic and behavioral differences among individual groups of investors. Design/methodology/approach – The proposed models in this paper use multivariate analysis to examine the relationship between financial literacy and portfolio diversification. Investors’ biases have been measured by means of a questionnaire comprising several items, including indicators of investors’ portfolio fragmentation, financial literacy and socio economic variables. The sample consists of 256 small investors actively trading on the Tunisian stock market. Findings – The results suggest that investors’ experience, financial literacy level, age, their use of the availability heuristic, familiarity bias and portfolio size, have a significant impact on the diversity of assets included their portfolios. Research limitations/implications – The main limitation of the empirical study is the small size of the sample. A larger sample would have given more reliable results and could have enabled a wider range of analyzes. Practical implications – The paper encourages investors to make their investments decisions based on their financial capability and experience levels and to avoid relying on their sentiment. Social implications – The paper encourages governmental organizations to establish training programmes aimed to develop the individual investor’s financial literacy level. Originality/value – The current study is the first of its kind focusing on the link between financial literacy and portfolio diversification, within the specific context of Tunisia.