Why ‘thinking like a woman’ will make you a better investor
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We can thank Johnny Appleseed, the 18th century New England farmer, for apple pies. He dispersed apple seeds far and wide, thus bringing the delicious fruit to millions. Ideas are like seeds: If you spread them around, they eventually take root and self-propagate.
One such idea is that women are not as good as men at investing money. Yet studies show that women consistently outperform men in managing and investing money – both as regular individuals and as financial professionals, and during good markets and bad.
In a classic study conducted at Haas School of Business at the University of California in Berkeley, researchers analyzed the stock investing behaviour of 35,000 households over a six-year period. Female investors outperformed their male counterparts by 94 basis points (almost 1%), which doesn’t seem like a lot but compounds over time to a much larger sum. The researchers concluded that male investors’ underperformance was primarily due to too-frequent trading — 45 per cent more often than women, with single men being especially quick on the draw with an excess trading frequency of 67 per cent. High trading frequency cuts into returns due to commissions, taxes, as well as the pitfalls of market timing; e.g. buying high, selling low.
More recent studies have confirmed the trend. According to research by Fidelity Investments, based on reviewing eight million investment accounts, women save 40 per cent more than men and their investments perform better on an annual basis. Yet in a companion survey that asked participants which gender is better at investing money, only a meagre 9 per cent said “women.” Stereotypes are sticky.
Among financial professionals whose job it is to outperform the markets using complicated investment strategies, female managers of hedge funds, REITs (real estate investment trust) and CDOs (collateralized debt obligations) also outranked their male counterparts.
Financial outperformance also extends to uneducated women in developing countries who are more likely than men to repay microcredit loans and to invest in their children’s nutrition and education to increase the family’s wealth over time, compared to men who spent the money on snacks and luxuries. And, according to studies by Goldman Sachs, Columbia University and others, companies with large female staffs are more profitable on every measure.
What is it about women’s financial abilities that is often overlooked? And how can we learn to “invest like a woman” to improve our own investment returns?
Confidence is good – overconfidence, not so much
Women tend to be less confident as investors. While a total lack of confidence can be paralyzing, being overly confident is also a hazard. Men report feeling more confident in their abilities — even when such feelings are not warranted. Overconfidence leads to greater risk-taking behaviour and more frequent trading based on the belief that one can “time the market,” both of which can have a negative impact on returns. Women, on the other hand, tend to take a more defensive approach to investing, being more inclined to conduct research before initiating a transaction.
Swinging for the fences
Unlike many men who are interested in achieving outsize gains from their investments, women primarily invest to reach life and financial goals. Therefore, women diversify their portfolios to mitigate risk. They also take a longer term view. This approach permits women to behave more rationally during market corrections rather than panic selling into a falling market. Due to the power of compounding and the historical upward trend of equity markets, slow and steady is the surest way to win the race.
The female brain
Could women’s neural functioning contribute to their investing success? Some scientists postulate that women’s superior abilities in pattern recognition give them the edge in what is sometimes referred to as “women’s intuition.” All investors could benefit by stepping back to look at the big picture to discern trends.
“Let’s agree to disagree”
Women tend to be contrarian investors who are more skeptical about “hot stocks” and “sure bets” than men are, and therefore are less likely to incur permanent capital loss; a fancy way of saying “losing your shirt.”
Back to the future
Women’s investing prowess is not only a recent phenomenon. Based on ethnographic studies, women have historically over-contributed to the family’s welfare. Images of men hunting large beasts to feed the tribe are dramatic, yet incorrect. Studies show that it was women’s daily hunting of small animals, such as fowl and lizards, as well as their gathering of larvae, eggs, honey, seeds, nuts, fruits, and plant medicines, that provided more than 60-80 per cent of the family’s calories. Furthermore, bone scans of prehistoric women show that more than 7,000 years ago, they did the majority share of farming with an upper body strength that exceeds that of today’s elite female athletes.
Isn’t it time we discarded limiting stereotypes about women’s financial aptitudes? Study after study shows that it just doesn’t add up.
Rita Silvan, CIM™, is personal finance and investment writer and editor. She is the former editor-in-chief of ELLE Canada magazine and is an award-winning journalist and tv media personality. Rita is the editor-in-chief of Golden Girl Finance, an online magazine focusing on women’s financial success. When not writing about all things financial, Rita explores Toronto’s parks with her standard poodle.
Rita Silvan is a paid Sonnet spokesperson.