About eighteen months ago, we presented a seminar, “What Women Want” in which we identified four aspects where women differ from men financially: They live longer. They generally earn less over their lifetimes. They usually are the ones to take a career break to raise children or take care of an elderly parent. And, finally, then tend to be more conservative in their investing. It’s the fourth aspect that we will talk about this month.
Wall Street professionals are often portrayed as dominated by fast-paced trading and massive risk-taking. But it turns out that qualities like patience, humility and risk aversion can drive better investment returns over time. And women tend to naturally exhibit these qualities.
Research has shown that female professional investors, although vastly under-represented in the industry, have outperformed their male counterparts. And they have, in large part, based on three human qualities noted above. These are traits all investors, regardless of gender, should exhibit.
One of the most common mistakes made in investing is a lack of patience or trading too much. Studies have shown the more an investor traded, the lower his or her returns. Despite this evidence, investors are buying and selling at a more rapid pace than ever. One study showed that in 2015, the average stock was owned for eight months; fifty years ago, the average was eight years. The study found that female professional investors trade 30% less than males. Anecdotally, it makes sense that fewer trades are better than more trades. There are only so many good investment ideas and they need time to succeed.
Another positive investment trait women tend to have over men is humility. One research study showed that only 25% of women feel knowledgeable about investing compared with 46% of men. What is interesting in what the study determined is that less confidence (or more humility) actually can lead to better investment results. One opposite of humility is overconfidence, the idea that an investor knows more than the market. This is not meant to be a discussion of active versus passive investing, but many investors overestimate how much they know. Research has shown that women tend to be less overconfident than men. A humble investor is likely to do more research, take more time in making investment decisions and be more satisfied to hit “singles and doubles” than in swinging for the fences to hit an “investment home run”.
The final investment trait women seem to possess more of is risk aversion. We have spoken many times that the best way to make money is to first not lose money. We have talked about how a fifty percent decline in an investment requires 100% increase just to get back to even. Maybe because of lower self-confidence, research has shown that women investors tend to invest in less-risky assets and make fewer changes to their strategy. These types of portfolios tend to underperform when markets are surging but they tend to lose less when markets decline.
We believe the unique traits of professional female investors also apply to female investment clients. One reason it is important for us to understand how women and men differ when considering investments is that a large part of our job is behavioral finance. Success in investing isn’t just picking the right investments but its understanding how different people look at the investing universe. It can be based on age, income and asset level, life stage and gender. The more we are able to observe and understand those differences, the more successful the investment plan will be and the stronger the relationship between client and advisor.