Why women are better investors
August 06, 2021
Chief Asset Management Officer at BlueOrange Bank
I am going to ask you three questions and I would like you remember the first answers that pop into your head.
Ready? Here we go.
Question #1: do you think emotional control is an important factor in successful investing?
Question #2: who do you think has more emotional control: men or women?
Question #3: who do you think are better investors: men or women?
This is obviously not the proper format to conduct an interactive discussion and analysis, and there are no prizes or punishments for being right or wrong. After all, I asked you what you thought, not what you know. As psychologist Daniel Kahneman examined in the book “Thinking Fast and Slow” first level thoughts inherently are forged by subjective bias, not rational reasoning.
Since I cannot possibly know your responses, I am going address some factors, or rather stereotypes, which might have played a part in inspiring your answers.
A pervading stereotype in our society is that women are more emotional than men.
Often times this classification has been used to disparage women. ‘Emotional women’ are perceived as inferior or less cut out for success – especially in business – than presumably more rational, even-tempered men.
There are many problems with this facile line of reasoning. But the purpose of this article is to discuss investment performance, so I will not veer off topic and be as objective as possible.
If you answered that emotional control is an important factor in successful investing you are absolutely correct.
Jumping to question #3, female investors are actually more successful than men. They have higher investment returns.
What’s more, the reason that men perform more poorly than women is because men, not women, are too emotional when it comes to managing their investments. And when I say that the data points to men being too emotional in terms of managing investments, please do not think that his has anything to do with emotional intelligence, which is a completely other topic. Put harshly, the data points to men being too emotional, in the detrimental, hysterical sense.
Let’s look at the data.
In 2018, researchers from Warwick University in cooperation with the UK brokerage firm Barclays studied the three year investment performance of 2800 investors. What they observed was that female investors outperformed male investors by an average of 1.8% per year. This might not seem like a very large difference, but on a compounded basis, this would imply that female investors would make double the returns of their male counterparts over a 40 year investment horizon.
A separate study by Hargreaves Lansdown, the UK’s biggest consumer investment platform, also found that women investors had an edge, returning on average 0.81 per cent more per year than men over a three-year period.
Breaking down performance attributions, Warwick’s researchers determined that there were three primary factors that were most detrimental to male investment performance.
First of all, men traded much more often that women, incurring higher commissions that took away from net investment returns. Secondly, men tended to invest in more speculative stocks and would ride them for big drawdowns rather than fix losses quickly. Lastly, men put a greater emphasis on trying to beat the market.
Women, on the other hand, traded less often, were less likely to invest in speculative stocks, and tended to buy and hold higher quality investments. Women also place a greater emphasis on achieving tangible financial goals, not beating the market.
As an investment manager, it comes as no surprise that the traits exhibited by female investors led to better investment performance than men.
However, before we declare victory and trumpet that women are better investors than men, it must be pointed out that of the 2800 participants in the Warwick study, only 500 were women. If women are truly better investors, then why do less women invest than men?
This relative lack of female participation in investing points to a deeper problem that has been evidenced by several other studies.
According to study conducted by Fidelity called “Women and Money,” fewer than 9% of female respondents said that they thought women were better investors than men.
Also, only 52% of women surveyed claimed to be confident about investing. For men this number was 68%.
The most damning statistic of all was that 61% of women would rather talk about death than money.
Ladies, what is going on?!
On one hand, we have clear evidence that female investors outperform men, but on the other hand, women are less likely to invest. Clearly what is lacking is not female competence but action. Why is this?
A survey by investment manager PIMCO points to what might be the main culprit for the relative lack of female participation in financial markets. According to PIMCO’s survey 49% of women claim to lack time more than they lack money.
It stands to reason that if females feel they do not have enough time to devote to their investments, they are more likely not to invest, resulting in less women investing.
This investing gap has very serious consequences for female financial well-being and has to be addressed for two very important reasons: the structural tendency for females to make less career income than men, and greater female lifespans.
In their study “Women and Financial Wellness: Beyond the Bottom Line” Merrill Lynch in partnership with Age Wave calculated that accumulated male earnings could, on average, be double those of females due to periodic exits from the workforce to manage life events such as childcare, elderly parent care, and spousal care. The average woman spends 44% of her adult life out of the workforce versus 28% for the average man. The gender pay gap exacerbates this issue as well. Secondly, women live longer, which means that they need to have more savings to finance their retirement. Longer lifespans result in higher medical expenses and outliving your spouse could result in greater expenses due to paying for assisted care.
These are serious issues, and it should come as no surprise that the number one response by females when asked about their largest financial regret was not having invested more (41%). Planning is paramount, and time spent learning more about investing and setting realistic financial goals can alleviate many sources of financial stress in the future.
Thankfully, there is another significant undercurrent underway. Female wealth is rising like never before.
The Boston Consulting Group has calculated that in 2010, total female private wealth stood at $35 trillion, and forecasted that amount to more than double by 2023 to $90 trillion or 32% of global private wealth. A significant driver of the increase of female wealth is inheritance from male spouses (remember: females live longer), and a higher likelihood of daughters talking over family businesses. A more even playing field in the corporate world is also leading to a significant rise in female wealth.
The male dominated investment industry has finally begun to figure out that they have to start paying considerably more attention to their female clients. For instance, why would a woman stay with a male wealth manager that spoke exclusively to her husband and did not include her in any discussions about managing their family’s financial wellbeing? As such, asset managers are trying to adapt themselves as quickly as possible to provide significantly better service to female investors.
This is a very positive development that is also driving stronger efforts for investor education.
It is also changing how money is invested and what industries will attract capital in the future. For example, 84% of women surveyed said that sustainable investing was important to them, versus just 67% for males. As female financial clout continues to rise, so will the propensity of values based investing, which will be a powerful force of positive change in the future.
Financial institutions are finally starting to pay attention to the needs and specific demands of their female clients, but there is still a long way to go. As you will have noticed, the data that I have referenced is predominantly from the UK and the US - markets that have established, albeit gender-biased investing cultures. Since our investing culture is still in its growth phase, we have a tremendous opportunity in Latvia to build a healthy and successful investment culture that goes out of its way to include women and adapt to the demands placed on their time.
This will not only benefit women, but society as a whole. And who knows, maybe even men here in Latvia might pick up some on the positive investment traits that enabled female investors to beat their male peers in the UK.
The Latvian version of this article originally appeared in the August 2021 issue of Forbes Latvia.