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For Better Returns, Invest Like a Woman

Posted
9/13/2013 12:42:00 PM
By: NerdWallet
Referenced Stocks:

Investors may want to go long on girl power and start shorting on male bravado if they want to see better returns in their portfolios. A high appetite for risk, aggressive tendencies and overconfidence of male money managers seem to be desirable traits to have in investing, but research suggests otherwise.

With larger returns than their male counterparts, it’s the more cautious approach taken by female money managers that should be more explored. Take a look at these three key advantages female money managers have when it comes to investing and see why you may want to invest like a woman instead.

Women are better at seeing the long term

A study by the University of Exeter Business School in 2012 compared trades between male and female directors and found that in the 20 days after male directors of a company bought shares of a stock, the stock price rose an average of 1.55% compared to 0.88% for female directors. This could be attributed to a knee-jerk reaction in the market that will mimic the trades of male directors but largely ignore what female directors do.

But when looking at the yearly performance of these trades, female directors saw an average monthly gain of 0.68% compared to 0.37% for male directors—a nearly four percentage point spread a year. In the long run, it was the women who performed better than men, although males had better short-term gains aided in part by a gender-biased, short-term market reaction.

Women Don’t Churn Their Accounts

Research from Brad M. Barber and Terrance Odean who teach at University of California Davis and Berkeley campuses respectively, showed that men tend to be overconfident when it comes to investing—often to a degree that proves harmful to their investment returns. In fact, their study shows that men trade stocks and other equities as much as 45% more often than women do, and this adds up to big differences in investment outcomes between the two sexes.

Frequent trading may seem like a good strategy, but many studies have shown that people who “buy and hold” tend to end up with more money in the long run. Excessive trading is often the byproduct of indulging in risky investment behaviors, such as speculating on “hot” stocks and trying to beat the market, both of which are universally recognized as poor long-term strategies when it comes to maximizing investment returns.

Women Manage Risk Better

Women are often perceived by our society as being cautious, while men are usually viewed as risk-takers, and this cultural dichotomy is certainly observable when it comes to the investing behaviors of males versus females. In general, women tend to make safer, more conservative investments while men hunt out more exotic and risky ventures.

This difference in investing behavior may go back to the overconfidence issue: men feel more comfortable betting with complex investments while women are more inclined to stick with what they know and fully understand. It’s true that with greater risk comes greater potential for reward, but research suggests that men aren’t as good at sniffing out a smart investment as they think.

A 2012 study from consulting firm Rothstein Kass showed that female hedge fund managers were able to realize a 9% average annual return for their investors that year while their male counterparts only made 3% for their clients; experts believe that this is due to female fund managers’ slightly more conservative portfolios, which are better able to stay afloat when the market takes a plunge.

While it’s unlikely that our society will agree to do away with the culturally acceptable behaviors it imposes on men and women any time soon, it’s worth noting that the ways that men and women learn to interact with their finances has a significant impact on their prospects for long-term wealth. And it seems that stereotypically “female” qualities don’t seem to be hurting women investors one bit.

 

Hannah Kim is a financial writer at NerdWallet. a site dedicated to helping consumers learn how to manage their money, whether it’s to help them find the best credit card for their needs, or find the right online brokerage account.