The secret of a successful investment lies in your feminine side
Our image of a savvy investor might be striped-clad, testosterone-fuelled, and a ruthless risk-taker. However, he is in grave danger of being overtaken by those of a more feminine persuasion.
One of the largest studies of investment activity, conducted at the University of California in 2001, showed that men traded 45% more frequently than women. However, its average risk-adjusted returns were 1.4% lower. Another large survey by DigitalLook found that women’s holdings grew 3% more than the FTSE in the year ending 31 July 2004, while those of men lagged 1%.
Since then, the evidence of female supremacy in the investment markets has been mounting. Now psychologists can identify the character traits that make a winning investor. They are also pointing out those traits that explain why more men end up counting their losses in the markets.
What are those attributes that put one above the other? The better ROI of women may be due to the simple fact that they are:
- more cautious
Women’s portfolios are more balanced and diverse. They also choose lower risk, less whimsical options.
- less competitive
Women invest less of their ego in a deal. They are less motivated to demonstrate their financial progress to others or to be in it for the excitement.
- more consistent
Women have been shown to support a less volatile portfolio than men. They are also better at disengaging from “information” that others may overreact to and ride out the ups and downs of the markets.
- More patient
They participate in fewer fund jumps, trade less frequently, and hold investments longer. Those who trade most frequently earn the lowest returns, studies by Barber and Odean (2000) and Carhart (1997) have found. This is true for both individuals and mutual funds.
- best researchers
Although women are generally less experienced investors than men, they will dig deeper and be less influenced by the herd.
Of course, these aspects of the female psyche also make women more conservative investors than men. And therefore, they may not reap the stratospheric gains (or have 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 become top-notch investors. But his winning traits may not be the usual masculine ones. True male investors may be more in touch with their feminine side than we think.
Aside from the lack of estrogen and fewer bags, what else explains the divide between winners and losers? There are three key psychological traits that, when it comes to making the smartest investment decisions, can trip men every time.
These are:
- Risk attitude
Men are less risk averse than women and will back portfolios that are more uncertain. They are more likely to put all their eggs in one basket rather than opt for a more secure and diverse portfolio. Men’s higher incomes and net worth also make it easier for them to take greater risks than women. An American study by Wang in 1994 also showed that women are more likely to be offered safer options than men, by advisers who expect them to be risk-averse.
- Overconfidence
Overconfidence is consistently found in more men than women, research shows. And this is especially true in male-dominated areas like finance. They overestimate the returns their investments will bring and the certainty of the return. They are also misjudged overconfident in the accuracy of their own knowledge and overestimate 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 larger margin.
- the herd instinct
Constantly monitoring the market can fuel men’s overactivity and cause them to act irrationally. Men are more likely to be drawn into financial follow-my-leader games and information cascades. They also err on the side of being too well-informed, instead disengaging from the endless stream of financial news and information and sticking to an annual portfolio review.
Even though women have more of the innate abilities that could bring them the best returns, sadly few of them are in the game. Male investors outnumber women by a ratio of eight to one, and a mother 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 overconfidence. “So many women have exactly what it takes to achieve dizzying financial heights,” she commented, “the only thing that stops them is knowing they have it and acting on it.”
