Our image of a canny investor might be clad in pinstripe, testosterone- fuelled and a ruthless risk-taker. Yet he is in serious danger of being outperformed by those of a more feminine persuasion.
One of the largest studies of investment activity, carried out at the University of California in 2001, showed that men traded 45% more often than women. Yet their average risk-adjusted returns were 1.4% less. Another large survey by DigitalLook found that women’s portfolios grew by 3% more than the FTSE in the year ended 31st July 2004, while men’s lagged 1% behind.
Since then the evidence for female supremacy in the investment markets has been steadily mounting. Now psychologists can identify the character traits that make up a winning investor. They’re also pinpointing those traits that explain why more men end up counting their losses in the markets.
What are those attributes that put one a cut-above the other? Women’s better investment performance may be down to the simple fact that they are:
- More cautious
Women’s portfolios are more balanced and diverse. They also choose more low risk, less faddy, options.
- Less competitive
Women invest less of their ego in a deal. They’re less motivated to prove their financial prowess to others or to be in it for the thrill.
- More consistent
Women have been shown to back a less volatile portfolio than men. They’re also better at tuning out the ‘information’ that others may over-react to and riding out the ups and downs of the markets.
- More patient
They engage in less fund hopping, trade less frequently and hold investments for longer. Those that trade most frequently earn the lowest returns, studies by Barber and Odean (2000) and Carhart (1997) have found. This is true of both individuals and mutual funds.
- Better researchers
Although women on the whole are less experienced investors than men, they will research more thoroughly and be less swayed by the herd.
Sure, 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 losses) that men do. But, by investing in funds that are consistently good over time women’s net returns are higher. And isn’t that what counts in the end?
Of course, many men have what it takes to make them top-notch investors. But their winning traits may not be the customarily masculine ones. The truly top male investors may be more in touch with their feminine side than we’d think.
Apart from a lack of estrogen and fewer handbags, what else accounts for the winner-loser divide? There are three key psychological traits that, when it comes to making the savviest investment decisions, can trip men up every time.
- Attitude to risk
Men are less risk averse than women and will back portfolios that are more uncertain. They’re more likely to put all their eggs in one basket instead of opting for a safer, more diverse portfolio. Men’s higher earnings and greater net worth also makes it easier for them to take greater risks than women. A US study by Wang in 1994 also showed that women are more likely to be offered safer options than men, by advisors who expect them to be risk-averse.
Overconfidence is consistently found in more men than women, research shows. And this is especially true in male-dominated arenas such as finance. They overestimate the returns their investments will bring and the certainty of the return. They also have a misjudged overconfidence in the accuracy of their own knowledge and over-rate their own ability. In a Gallup study, both men and women expected their portfolios to outperform the market but men expected theirs to outperform it by a greater margin.
- The herd instinct
Constantly monitoring the market can fuel men’s over-activity and cause them to act irrationally. Men are more likely to get drawn into financial follow-my-leader games and information cascades. They also fall foul of being too well informed, instead of tuning out the endless stream of news and financial information and sticking to an annual portfolio review.
Despite women having more of the innate skills that could earn them the best returns, still lamentably few of them are in the game. Male investors outnumber females by eight to one, and a mere 3% of hedge funds are headed by a woman. Simonne Gnessen, who owns Wise Monkey Financial Coaching and has a predominantly female clientele, says women could do with borrowing some of that male over-confidence. “Many women have exactly what it takes to reach dizzy financial heights,” she commented, “the only thing holding them back is knowing that they have it and acting on it.”