The Financial Independence Blog

Do Women Make Better Investors?

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Originally published on Newsmax.com – April 4, 2015 

Historically, societal and cultural norms taught women to grow up believing that men should make the financial and investment decisions. Thus, given the messaging that a vast majority of women have received, it is not surprising to see that according The Journal of Financial Planning, 47% of women said “investing is scary for me”.[i]   Further to this point, an Allianz study found that over 40% of women said “sufficient knowledge” is the single largest barrier to getting more involved in finances.[ii]

Psychologists found that in general, women have lower self-esteem in finances due to a lack of training and encouragement to get involved in the financial decision making and investing. However, it is counterintuitive to the research revealing that based upon biology and psychology, women have an advantage to be better investors than men. A University of California professor, Terry Odean, who studied stock picking by gender for more than two decades, took a seven-year period to analyze gender biases and results in investing.

According to the study, single female investors outperformed single men by 2.3%, female investment groups outperformed male counterparts by 4.6%, and women overall outperformed men by 1.4%.  The data also revealed the biological and psychological gender differences that may have impacted the results. Men traded 45% more often than female investors, (the more you trade, typically the worse performance is). The study also found that men held onto their losses a lot longer, tended to be overconfident and less likely to seek another opinion. To summarize the main points of the study, it found that men who felt they were being observed and judged by their peers, were more likely to make riskier choices in order to assert their dominance. According to Richard Peterson, a psychiatrist who studies the role of emotions in investing decisions, men, being characteristically more prideful and overconfident, tend to take too much risk, and over-trade.[iii] When they are making money, instead of letting winning stocks run, they are more likely to sell too soon as a means of validation. They may feel as if they are not able to have a demonstrable winner until they could sell at a profit. Men tend to be more competitive and thrill-seeking by nature, often focusing on the short-term track records of their portfolios. And more than women, men are predisposed to leave their losers open, because for men, mistakes are harder to admit.

This is where biology also plays a role. Women produce only 10% of the testosterone of men, which makes women less likely to be driven by risky gambles and overtrading. Because women take less/fewer risks and are more likely to have an awareness of their emotions, women tend to over analyze and gather as much information as possible before making a decision. Instead of being driven to sell quickly by inner fears, women were more likely to stop and examine these fears and are more patient.[iv] They are less likely to succumb to internal pressure to sell during market panics or jump on the bandwagon during rallies. Women invest in what they know. Women do their due diligence, are thorough in researching an investment and tend to take their time before investing in a company, while paying more attention to red flags.[v]

More than 70% of the 2010 valedictorians were women.[vi] Women own over 40% of U.S. businesses and contribute $4 trillion to the U.S. economy.[vii] 45% of millionaires in the U.S. are women.[viii] Given what would seem a predilection for success in investing, why is the financial services industry landscape coming up short with female managers? Today, it is surprising that only 3% of hedge fund managers and less than 10% of mutual fund managers are women. The Rothstein Kass Institute who created the “Rothstein Kass Women in Alternative Investments Hedge Index” analyzed the returns of female Hedge Fund Managers through the third quarter of 2012, the results showed women produced a year-to-date outperformance of over 6% above the HFRX Global Hedge Fund Index.

Women are well positioned to empower themselves to be financially independent by taking the reins in household finances as well as learning investment strategies. The research confirms that women have the intellectual capability (what many of us already knew), as well as the biological and psychological attributes to be great investors. It is time women encourage and empower one another to demonstrate their financial prowess, not only in their personal lives, but also to expand their presence in the investment management arena.

Kathleen A. Grace, CFP®, CIMA® is a Managing Director at United Capital and Amazon Best-Selling Author of Prince Not So Charming, a financial planning novel.

[i] Eleanor Blayney, CFP®, The Journal of Financial Planning, Vol. 23, Issue 10, October 2010

[ii] “The Allianz Women, Money & Power Study”, 2006

[iii] “Research Reveals the Role Emotions Can Play in Investing” by Ted Schwartz, ABC News, November 28, 2011

[iv] “Research Reveals the Role Emotions Can Play in Investing” by Ted Schwartz, ABC News, November 28, 2011

[v] Behavior Economics Show the Men Tend to Take More Financial Risks and Hold Losing Stocks Longer, (Bill Mayer for the Washington Post), Robert Carden, October 11, 2013

[vi] The Decade of the Women Entrepreneur Interview with Sharon Vosmek, Astia

[vii] The Political and Economic Power of Women, Page 4, Center for the International Private Enterprise

[viii] http://womenscenter.theamericancollege.edu/assets/pdf/TWC_spring10_FIN_Newins.pdf