It may sound surprising to some, but an increasing number of books and academic studies are demonstrating that when women invest in the stock market, their investments tend to perform better compared to those made by men. So what’s the evidence and which factors make women better investors than men?
The first and most famous of the studies, published in 2011 by Brad Barber and Terrance Odean (Boys will be Boys: gender, overconfidence, and common stock investment; University of California), examined 35 000 household accounts held at a large discount brokerage firm and found that women investors tended to outperform men by a margin of roughly 1% per year as men acted on their “useless ideas“ significantly more often than women did.
An article in The Finance Professional’s Post (a free online publication published by the New York Society of Security Analysts (NYSSA) which “educates readers in the finance and banking sectors on the forces that shape their business”) reported that the female-run hedge funds in the AsiaHedge Composite index posted a total return of 153.26% from January 2000 to December 2007, outperforming the overall benchmark, which returned 88.82% over the same period.
That article also quoted Women in Fund Management, a report published in 2009 by the US National Council for Research on Women (NCRW, a network of 120 leading research, policy and advocacy centres in the US committed to “improving the lives of women and girls“), as saying that women fund managers take a more long-term, measured approach to risk, are more detail-oriented researchers and are less likely to succumb to ‘groupthink’ than the traditional male manager.
The divide between women investors and men
According to the literature and academic research that has been published so far, the main reasons why women can be considered to be better investors than men are:
1. Their choices tend to be more diversified – they buy a wide variety of investments, which helps to reduce the risk of losing money.
2. Women do more research before investing – this is partly because women have less confidence in themselves. Male investors, by contrast, tend to suffer from overconfidence.
3. Women investors trade less often – as a result, transaction costs do not eat into the performance of their investments as much. Studies have found that men traded up to 67% more than women and that very active traders tended to have the poorest results.
4. Women are better at admitting their mistakes – this is important in the investment field where objectivity has to come before personal pride.
5. Women are more likely to accept help – a 2015 survey conducted by BNP Paribas Investment Partners on attitudes towards retirement savings in France found that 33% of women always spoke to a financial advisor before investing. Similarly, a 2015 study by Vanguard in the US found that women tended to use professionally managed retirement accounts, which often led to better performance.
Warren Buffet ‘invests like a woman’
Some have even gone so far as to state that Warren Buffett, known as the Oracle of Omaha, invests like a woman because he takes a calm, steady and longer-term approach to investing. Writing on the investment website The Motley Fool, LouAnn Lofton noted that, similar to many female investors, Buffett does not trade very often and can control his emotions even during volatile market moves. Showing Buffet to be atypical among men in this regard, a Vanguard study analysing how owners of individual retirement accounts (IRAs) reacted to the market falls in the 2008 financial crisis, found that men were more likely to panic and sell at or near the bottom than women.
Controlled by their hormones
In her book ‘Women of the street: why female money managers generate higher returns‘ (Palgrave Macmillan, 2015), alternative investment consultant Meredith Jones says: “Women create both cognitive and behavioural alpha with their investment style, which contributes over the long run to outsized investment returns.” Like Lofton, she suggests that male hormones such as testosterone could be part of the reason. Lofton adds that testosterone could be responsible for herd-like risk-taking behaviour by men in the financial markets. “That makes a lack of it a decided asset,” she concludes.
A study by stock-market trader turned neuroscientist John Coates found that male traders can become addicted to the feeling of euphoria known as ‘the winner’s effect’. “When under the influence of testosterone, male investors, particularly younger males whose testosterone levels are at their peak, may become less rational and more dogmatic and not execute their strategy faithfully.”
Coates also found men’s probability weighting skills became more distorted under stress, which was related to their levels of cortisol.
Demand for female fund managers on the increase
According to Meredith Jones, the number of institutional investors requesting mandates specifically for women-owned or women-managed funds has increased over the past five years. In some cases, this is because pension funds want to more closely match their fund investors’ profiles. One example is large pension funds for school teachers in the US, where around 76% of teachers are female.
Women’s growing wealth could spur this trend. According to a report by the BMO Wealth Institute, women in the US control 51.3%, or USD 14 trillion, of personal wealth and are expected to control roughly two thirds of the wealth, or USD 22 trillion, by 2020. While now only 30% of registered financial advisors are women, Jones expects advances in neurofinance and continuing research into the behavioural factors to gain in importance, favouring the feminine side of the advisory business.
Unfortunately, few women use their innate skills when investing
Research by Fidelity Investments found than in the US, men saved 7.9% of their salaries and women 8.3%. However, a survey BNP Paribas Investment Partners conducted in France found that women had much lower levels of savings (50% lower on average) than men. The explanation advanced for this was their tendency to prioritise spending on their children rather than on savings or investments. However, even younger women in France – aged 18 to 24 – who had no children also saved less than their male counterparts.
But as their control of wealth shifts, perhaps their sense of empowerment and confidence when it comes to making investment decisions can shift with it, setting women up for comfortable retirement years with enough money to take care of basic expenses and putting them on the same level as their male counterparts. This will take time and would be helped by a growing presence of women in the investment industry, but in that process, the one great virtue that women generally boast and men often struggle with should stand them in good stead – patience.
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