Guys, here’s one thing you may want to rely on your wife for – investing advice. That’s right, the evidence has been mounting, and the conclusions are clear – women are better investors than men.
Surprised? You’re not alone. Even most women themselves believe they are far less superior than men when it comes to investing. There are plenty of studies to show that. But when you examine the actual performance results, women’s portfolios regularly outperform men’s.
Recently, one firm wanted to bring this knowledge to the forefront. State Street Global Advisors put up a statue of a girl facing off with the Wall Street bull. The media dubbed her as “the fearless girl.” It got a lot of attention, this girl making such a bold statement on a street where it’s considered a man’s world.
Executives from the company commented to multiple news outlets that they strategically placed the statue there on International Women’s Day, to kickstart the conversation of women and investing. In particular, the fact that women are indeed better investors than men.
Boys Will Be Boys – A Good Thing When Investing?
Terrance Odean and Brad Barber, professors at Berkley’s Haas School of Business, are some of the most prominent researchers on the gender gap in investing. Based on their research in the 90s, they found that men traded 45% more than women. This research led to their paper Boys Will Be Boys, which has been published in dozens of scholarly journals.
Actively trying to time the market commonly leads to lower returns. Odean and Barber site this as the biggest cause of the widening gender performance gap. Men’s active trading during their research period caused them to have average returns that were a full percentage point lower than women.
In comparison, they found that women tend to be better at behaving in ways that lead to long-term investing success. This means adhering to some of the golden rules of investing, such as staying in the market, weathering market fluctuations without making drastic changes, not taking unnecessary risk, and sticking to the strategy that best aligns with their goals.
Essentially, women tend to be “buy and hold” investors, heeding the advice of experts like Buffett and Bogle. They’re much better at investing than they give themselves credit for.
The Results Are In
According to research from Fidelity, women outperformed men by 0.4% in 2016. That may not seem like much, but it can add up over time. Especially given the fact that the study found women have outperformed men for the last decade. Women also saved 9% of their paychecks, compared to an average of 8.6% saved by men.
That’s how women can end up with a lot more money than men overtime.
Betterment PhD research scientist, Sam Swift, also built a similar case. In a recent study, Swift went back through 60,000 investment accounts from January 1, 2012 through January 6, 2016, and examined the account holder’s activity. Here are three key findings from the study:
1. Women logged into their account 45% less frequently than men. Less logins mean a decreased chance of seeing your portfolio when it’s down, which can lead you to make a bad decision.
2. Women take less risk than men. They had a tendency to stick with their recommended allocation model, while men deviated from the advice, usually taking more risk than suggested.
3. Women tend to be much better at staying disciplined during market fluctuations. They changed their allocation 20% less frequently.
Yet, despite the volumes that this evidence speaks, another study from Fidelity found that 8 in 10 women hold back from talking about their finances and investing, simply because they lack the confidence to do so. The majority also don’t think they’re smart enough to talk to a professional advisor on their own, and believe that they are grossly underprepared for retirement.
How can this be what women truly think, when they’re in fact the investing alpha? Welcome to the conundrum of conundrums in finance.
The Psychology Behind It All
On the surface, this evidence simply highlights the difference in performance between male and female investors. But when you dig deeper, it gives you a unique look into the psychological make-up of men and women.
Odean and Barber’s research led to an important finding – men tend to be inherently overconfident, and it shows up in their investing behavior.
This is what they believed led to men’s active trading, and in turn received most of the blame for their poor performance. Overconfidence bias has been most commonly linked to the bad behaviors of marketing timing and stock picking, which can wreak havoc on your portfolio, no matter your gender.
Conversely, the female psyche causes women to be inherently risk-averse and goal-oriented. They are focused on the long-term rather than the short-term, and don’t feel the need to trade in and out.
This lead to better performance for women. However, women’s lack of investing confidence causes many of them to not invest, remain ultra-conservative, and avoid seeking professional help. That’s when their nature becomes destructive.
Perhaps that’s the reason the conundrum still exists – women behave in a way that leads to solid investment performance, but they think in a way that fosters little to no confidence in their abilities.
Why Does It Matter to You?
The point of the studies cited here, and this article, aren’t to dub one gender as the savvier investor. It’s also not to claim that gender is a direct driver of investment success. Rather, it’s to better understand the role psychology plays in investing, and where the strengths of each gender lie.
Each gender could learn something valuable from the other. Case in point, women need to become more confident when it comes to investing and their finances. Not because of gender equality, but because it’s vital common sense given the reality we face today. According to Pew research, 40% of women already out-earn their spouses. Furthermore, nine in 10 women will be the sole financial decision maker in their household at some point in their life.
Men could benefit by humbling themselves to the market and reducing active trading. In addition to Odean and Barber’s findings, DALBAR’s 2016 annual report on investor behavior proves that bad investor behavior is the leading cause of under-performance, and contributes to poor performance over the long-term.
In essence, both men and women would benefit by understanding that a lack of confidence, as well as overconfidence, can hurt your performance.
You get one shot at this financial journey – one. Failure is not an option. So, you need to manage your money in a way where there is a very small possibility of failure. Above all, that means taking a seat at the table. It also means staying disciplined according to your investment policy statement, and implementing an investment strategy that aims to limit downside exposure and mitigate volatility, while still capturing potential. Now, that’s a philosophy that can work no matter what gender you are.