It's not because investors are stupid. In fact, new research suggests that intelligent investors' fund choices are no better than stupid investors' ones. A team of economists led by Mark Grinblatt at the University of California Los Angeles studied the unit trust holdings of Finnish investors. And they found that while investors with high IQs were more likely to buy funds with low fees, their investments performed no better than those of investors with lower IQs.
This corroborates other research. A study of over 3,000 German investors by economists at the University of Mannheim found that while financially literate investors are more likely than others to own tracker funds, even they also buy active funds. And they do so unwisely. The researchers concluded: "Differences in fund performance are not related to differences in financial literacy. As a group, sophisticated investors do not earn higher risk-adjusted returns with their cash moves into mutual funds."