Our image of the canny investor may be a pin-stripe-wearing, testosterone-fueled, ruthless risk-taker. However, it is in serious danger of being overtaken by those of a more feminine nature.
One of the largest studies of investment activity, conducted at the University of California in 2001, found that men trade 45% more often than women. However, their average risk-adjusted return was 1.4% lower. Another major study by DigitalLook found that women’s portfolios rose by 3% more than the FTSE in the year to 31 July 2004, while men’s portfolios lagged by 1%.
Since then, evidence of women’s advantage in the investment markets has steadily grown. Now psychologists can identify the character traits that make up a winning investor. They also identify the traits that explain why more men count their losses in the markets.
What are these attributes that put one above the other? Women’s better investment performance can be attributed to the simple fact that they:
- More carefully
Women’s portfolios are more balanced and diverse. They also choose lower risk, less fashionable options.
- Less competitive
Women invest less of their ego in the transaction. They have less motivation to prove their financial ability to others or get a thrill out of it.
- More consistently
Women have been shown to maintain a less volatile portfolio than men. They are also better at tuning in to “information” that others may overreact to and avoiding the ups and downs of markets.
- More patient
They deal with fewer funds, trade less frequently and hold investments longer. Research by Barber and Odin (2000) and Carhart (1997) found that those who trade the most often make the least profits. This applies to both individuals and mutual funds.
- The best researchers
Although women are generally less sophisticated investors than men, they will research more thoroughly and rely less on the herd.
Of course, these aspects of the female psyche also make women more conservative investors than men. And so they may not reap the stratospheric profits (or make the mega-hits) that men do. But by investing in funds that perform consistently well over time, women’s net returns are higher. And isn’t that what matters in the end?
Of course, many men have what it takes to make them first class investors. But their winning traits may not be conventionally masculine. Truly top male investors may be more in touch with their feminine side than we think.
Besides a lack of estrogen and fewer handbags, what else separates the winners from the losers? There are three key psychological traits that can trip men up every time when it comes to making smart investment decisions.
- Attitude to risk
Men are less risk averse than women and will support portfolios that are more uncertain. They are more likely to put all their eggs in one basket instead of choosing a safer and more diversified portfolio. Men’s higher wages and greater wealth also make it easier for them to take more risks than women. An American study by Wang in 1994 also found that advisers who expected women to be risk-averse were more likely to suggest safer options than men.
Studies show that overconfidence is more common in men than in women. And this is especially true in male-dominated fields like finance. They overestimate the returns their investments will bring and the certainty of returns. They also have a false overconfidence in the accuracy of their own knowledge and overestimate their abilities. In the Gallup study, both men and women expected their portfolios to outperform the market, but men expected their portfolios to outperform by a greater margin.
- Herd instinct
Constant monitoring of the market can encourage men to be overactive and make them act irrationally. Men are more likely to be involved in financial follow-the-leader games and information cascades. They also commit the sin of being too well informed, instead of turning off the endless stream of news and financial information and sticking to the annual portfolio review.
Despite the fact that women have more innate skills that could bring them the most profit, unfortunately, few of them participate in the game. Male investors outnumber female investors 8:1, and only 3% of hedge funds are led by women. Simone Gnessen, who owns Wise Monkey Financial Coaching and has a predominantly female clientele, says women could borrow some of this male overconfidence. “Many women have exactly what it takes to reach dizzying financial heights,” she commented, “the only thing holding them back is the awareness of who they are and what they are doing.”