When Harry Met Sally and They Compared Portfolios (AKA How Men and Women Invest Differently)
Few things fascinate people like the differences between men and women. How the different genders think, behave, and relate to each other has been explored in film, in books, and in countless academic studies.
And, not surprisingly, we find the topic of money to be endlessly interesting. In combining these two subjects, it seems more than appropriate to look at the differences between male and female investors.
Before we begin, a caveat is in order. The research we’ll discuss only looks at how the average male or female invests, but that’s not to say that every man or women will conform to these observations. Disclaimer aside, studies show that men and women do tend to invest differently.
For one thing, men seem to be the more aggressive investors. A study by asset management firm BlackRock in 2015 found that 55% of women were not willing to take any risks with their money, compared with 47% of men. In addition, women are more inclined to have a greater portion of their portfolios in cash, which can be interpreted as a very risk-averse approach.
Interestingly, the BlackRock study revealed that Canadian women are even more risk-averse than their female peers around the world. Whereas 55% of women globally were unwilling to take risks, in Canada the figure shot up to 61%. Further, a paltry 19% of Canadian females felt comfortable investing in the stock market, compared to 21% of women around the world and 37% of Canadian men. In other words, by a 2 to 1 margin, Canadian men feel more at ease putting their money into the asset class that, over the long run, tends to have the highest rewards.
Given that women seem to take significantly less risk, you might be surprised to hear that their investment performance is basically on par with that of men. American mutual fund company Vanguard found that between 2009 and 2014, female investors earned a 9.7% annual return, vs. 10.1% for men.
However, other studies have found that women actually outperform men when it comes to market returns. The most famous research on the topic, published in 2001 by professors at the University of California, showed that women outperform men by an average of 1% per year. The authors found that men trade far more actively than women. Because over-trading usually lowers returns, in part due to high transaction costs (like commissions), male investors are not as successful as female investors. Intriguingly, the authors suggested that men trade too much because they are overly confident in their abilities.
This reveals a very interesting reason why female investors may be better investors: their lack of confidence. As overconfidence leads to greater trading and thus lower returns, a more hesitant approach to investing can actually pay off.
Women also display other traits that may help them as investors. According to research by Vanguard, women are more focused on their long-term goals, such as putting a child through college. In addition, they are more likely than men to consult a financial advisor. Perhaps because they don’t feel as comfortable going it alone, females are more willing to seek help. Finally, women on average save more of their income for retirement than men. This obviously helps them build up their portfolios over time, although persistent pay inequality means they still may not end up with the same retirement nest eggs as men.
Of note, it’s not just among average investors where women match or outperform men. Among hedge fund managers, who manage money for ultra-wealthy investors, females beat men by a wide margin. One possible explanation is that whereas male hedge fund managers may be more prone to managing portfolios based solely on their personal views (meaning egotistically), women are more likely to take a collaborative approach. By canvassing colleagues’ opinions and synthesizing various points of view, it makes sense that these female investors will form better judgments than male counterparts.
All this is not to say that women can’t learn something from how men generally invest. If women were, on average, willing to take a bit more risk with their investments, their long-term returns might be even better. To do so, they need not trade more often, but perhaps increase their weighting towards equities when it seems prudent to do so.
Regardless of gender, the key lessons for all investors remain the same: maintain a well-balanced, diversified portfolio of equities and fixed-income securities (and we have Canada’s best GIC rates) and refrain from overtrading. It’s easy to be distracted by the short-term noise of the stock market but keeping your focus on a solid investing plan will pay off in the long run.
Flickr: MCAD Library