Our notion of an insidious investor may be clothed in testosterone strips and a relentless risk-taker. Yet he is in serious danger of being better than those with a more feminine conviction.
One of the largest investment surveys conducted at the University of California in 2001 found that men traded 45% more often than women. However, their average risk-adjusted return is 1.4% lower. Another large DigitalLook study found that women’s portfolios grew 3% more than FTSE in the year ended July 31, 2004, while men lagged behind 1%.
Since then, the evidence of women’s dominance in investment markets has steadily increased. Psychologists can now identify the character traits that make up a profitable investor. They also point to these traits, which explain why more and more men are ultimately counting their losses in the markets.
What are those attributes that put one crop above the other? The better investment performance of women can be reduced to the simple fact that they are:
- More cautious
Women’s portfolio is more balanced and diverse. They also choose lower-risk, less bizarre options.
- Less competitive
Women invest less of their ego in a deal. They are less motivated to prove their financial situation to others or to be in it because of the thrill.
- More consistent
Women have been shown to maintain a less volatile portfolio than men. In addition, they are better at tuning in to “information” to which others may overreact and drive out market ups and downs.
- More patient
They participate in less money transfers, trade less often and hold investments longer. Those who trade most often get the lowest returns, according to studies by Barber and Odean (2000) and Carhart (1997). This applies to both individuals and mutual funds.
- Better researchers
Although females are generally less experienced investors than males, they will explore more thoroughly and will be less shaken by the herd.
Of course, these aspects of the female psyche also make women more conservative investors than men. And so they may not make the stratospheric gains (or make mega losses) that humans make. 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 everything they need to make them first-class investors. But their winning traits may not be usually masculine. True top male investors may be more in touch with their female side than we might think.
Apart from the lack of estrogen and the smaller bags, what else is the reason for the division between winner and loser? There are three key psychological traits that, when it comes to making the most sensible investment decisions, can stumble men every time.
- Attitude to risk
Men are less at risk than women and will support wallets that are more uncertain. They are more likely to put all their eggs in one basket instead of choosing a safer and more diverse portfolio. Higher men’s incomes and higher net worth also make it easier for them to take greater risks than women. A U.S. study by Wang in 1994 also showed that women were more likely to offer safer opportunities than men than counselors who expected them to be less risk-averse.
- Excessive self-confidence
Research shows that overconfidence is more common in more men than women. And this is especially true in male-dominated arenas such as finance. They overestimate the return that their investment will bring and the security of return. They also have an overconfidence in the accuracy of their own knowledge and overestimate their own abilities. In a Gallup study, both men and women expected their portfolio to outperform the market, but men expected their portfolio to outperform it.
- The herd instinct
Constant market surveillance can fuel men’s overactivity and make them act irrationally. Men are more likely to be involved in financial games to follow my leader and information stunts. They also delude themselves that they are too well informed, instead of adjusting the endless flow of news and financial information and sticking to an annual portfolio review.
Although women have more innate skills that could bring them the best return, there are still a pitiful few of them in the game. Male investors outperform women by eight to one, and only 3% of hedge funds are headed by women. Simonne Gnessen, who owns Wise Monkey Financial Coaching and has a predominantly female clientele, says women could take on some of that male overconfidence. “Many women have exactly what it takes to reach dizzying financial heights,” she said. “The only thing holding them back is knowing they have it and acting on it.”