Household Discretionary Wealth and the Cost to Mutual Funds

We show that shocks to household discretionary wealth, identified as months with five Fridays when biweekly and weekly paid workers receive an extra paycheck, are accompanied by higher retail mutual fund inflows and lower returns. These outcomes imply that household investors trade en masse with their wealth, which can cause funds to make costly portfolio adjustments. Consistent with retail investors driving the results, we use data from the Robinhood online brokerage platform and find that retail investors increase their stock holdings during these periods. We also find that during five Friday months, sentiment-based trading increases in retail mutual funds. Consistent with mutual funds’ mitigation of the shocks to fund flows, larger and more liquid funds’ performance is less affected. Collectively, we provide evidence that households trade in response to wealth shocks and this imposes real costs on mutual funds.