Why are women better at investing? What lessons can we learn from our female counterparts?
A recent Wall Street Journal article that surveyed retirement plan participants came to the conclusion that, on average, women are better at investing than men.
I have to admit, I was initially taken aback by that headline, if only for the reason that I’ve been in this industry for quite some time now, long enough to notice that if you look around you don’t see a lot of female financial advisors. That’s a less than scientific observation, I know, so I went online to check my anecdotal evidence, and it turns out that is correct. Only about one in four certified financial planners are women. In fact, the official number from the board of Certified Financial Planners is 23%.
I am surprised there aren’t more female financial advisors, considering some of the metrics that we’ll discuss. It’s pretty clear that, on average, women tend to have some behavioral traits that make them better investors than men. It does appear that women have a natural advantage over men in this area.
What specifically is it that makes women better at investing? What character traits give them these advantages, and what can men learn to be better at investing? There’s actually a term for this, it’s called “behavioral economics.” Behavioral economics is a method used by economic analysts that applies psychological insights into human behavior to explain economic decision-making.
If I’m going to convince our male readers that we might have a thing or two to learn from our female counterparts about investing, of course, I need to provide proof.
The first data point comes from a Washington Post article from Terry Odean, a University of California professor. Odean has studied stock-picking by gender for more than two decades. A seven-year study found that single female investors outperform single men by 2.3%. Female investment groups, which I’m assuming means mutual fund managers or hedge fund managers, outperform their male counterparts by 4.6%, and women overall outperform men by 1.4%. What Odean concluded was that one of the primary reasons men underperformed was because they traded 45% more than female investors. Men are making a higher quantity of bad financial decisions than women. More trading leads to lower performance.
There is a lot of potential behavioral psychology that goes into that, but what they’re talking about specifically is more trading leads to higher costs, which sap from your investment performance.
Some additional proof comes to us from Forbes Magazine. Meredith Jones is a financial expert and the author of the book Women of the Street: Why Female Money Managers Generate Higher Returns (and How You Can Too). Jones says women are outperforming men in just about every investment category. She conducted a study by creating an index of female hedge fund managers and comparing their performance against an index that represents a broad hedge fund universe. After this research, she found that the performance over the 1, 3, 5, and 6 1/2 year periods, in every single case, women outperformed, often significantly. In fact, over the 6 1/2 year period, the longest factor that she measured by, women outperformed men by almost six percentage points.
Betterment has shared similar ideas regarding why women have better investing outcomes. Betterment is an online financial-planning software tool that invests clients’ money for them. It’s a financial firm that uses computer algorithms to automate the investment process. The common parlance for this sort of company is a “robo-advisor.” What they found by looking at their customer data is that their female customers were more likely to stay the course and keep a long-term mindset, when compared to male investors.
Set it and Forget it!
When working with clients, we often talk about the “set it and forget it” mentality. You’ve gone through the trouble of creating a financial plan, and you should stick with that plan. You don’t want the short-term machinations of the market to dictate your behavior. Betterment is saying that their female clients are better at creating a plan and sticking with it. Additionally, Betterment said that women log in to check their accounts less often than men. They also change their investment allocations about 25% fewer times than men do each year. That’s very similar to some of the other studies that we looked at that said men trade their accounts more often. Now, that could be knee-jerk reactions, it could be overconfidence, it could simply be that the extra trading is extra cost, which takes away from your investment returns.
Being spontaneous is another way to think about knee-jerk reactions, which could lead to abandoning long-term strategies for short-term bad markets. If we flip that around, chasing returns in a good market, is a losing proposition that the average female investor, statistically speaking, would be less apt to do.
Choose a plan, create a strategy, and stick with it.
Women are more likely than men to choose an investment that contains a diversified mix of stocks and bonds, such as target date or balanced funds, than try to assemble a portfolio on their own with individual stock and bond funds from their plan’s roster. Of all of the funds investors have access to in 401k plans, men tend to pick the funds themselves, while women tend to chose the pre-baked investment strategies.
Vanguard’s research also shows that women are somewhat less likely than men to own company stock, and less apt to trade in and out of investments in their retirement account. Men might approach the investment process with overconfidence. They might try to pick the investments themselves, which would generally lead someone to chasing returns and picking investments that had a stellar track record over the last two or three years. Of course that doesn’t mean the investments are going to continue to have a great track record. If you chose a target date fund or an asset allocation fund, where a professional money manager is rebalancing those funds for you, you wouldn’t have that option to make those mistakes.
As I was reviewing these articles about women being better at investing than men, the common theme that appeared over and over again was that men were simply overconfident in their investing prowess. LouAnn Lofton, the author of Warren Buffett Invests Like A Girl and You Should Too, says men are looking for hot stock tips to get the quick win, and then to talk about it. We’ve seen this quite a bit in the past. This is of course anecdotal, but I’ve never had a case where a female client said, “What’s the next hot stock pick? What’s the next Google? What’s the next Microsoft?” It’s always our male clients that want the “get rich quick” investments. These investments tend to be a recipe for disaster when trying to build wealth long-term, especially in retirement distribution planning.
It’s one thing to try and pick the hot stocks in accumulation planning (we don’t recommend this method). Our company (Capital City Wealth Management) is on the other side of the coin; we’re distribution planning, we’re trying to make this money last for 30 years. There is an even greater chance of failure when you’re trying to get rich quick, if you feel like you’re already behind the eight ball when it comes to retirement income planning. Lofton says that men tend to invest with bravado and hold losing investments longer rather than admitting a mistake. Again, something that men could learn from women: don’t be overconfident. Men tend to be less likely to use the pre-baked portfolio options, target date funds, asset allocation funds, which was discussed in the Vanguard study. Women are more apt to choose the professional money manager’s ready-made portfolios, and they’re having better results from it.
There were two main takeaways that I learned from researching the idea of women as better investors. Number one, don’t be spontaneous. Be patient. Create a plan and stick with it. Show some self-control in bad markets. If you immediately pull the plug when the market gets bad, or you’re constantly expecting better than market returns, you don’t have a plan. That’s really speculation, and speculation isn’t any way to build good returns and strategy for the long run. The second takeaway is stop being overconfident. Guys, we don’t know the future. I tell this to clients all the time, we need to have some boring investments in our portfolio, because I have no idea what the market is going to do tomorrow, or next week, or next month, or six months from now. The only reason to invest in the market is because we believe in long-term positive returns, so being overconfident, wanting immediate results, is going to cause you to trade a lot, invest in hot stock picks and invest too heavily in your company’s stock. These are all losing options in the long-term. Don’t trade so much.
Ask for a Second Opinion
Finally, don’t be afraid to ask for a second opinion. That seems to be the behavioral trait that we come back to the most often, especially in the Vanguard study: women were more able to take a second opinion, delegate these long-term investment decisions to the portfolio managers and let them do what they’re paid to do.
After doing the research and reading the articles and data, it seems clear to me that women are better at investing than men – the behavioral economics traits are that they are more patient and willing to seek advice from others. Women aren’t overconfident, they don’t invest with bravado, they’re able to create a plan and stick with it.
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