There are many studies over several decades that show that women earn higher long-term investment returns. Is there truly a difference in performance based on gender?
According to the research there are differences between the amount of trading and risk taking in portfolios, knowledge of finances, and use of a financial advisor between men and women. Let’s take a further look at these issues.
Trading: Going back to the 1990’s when Brad Barber and Terrance Odean of the University of California Davis looked at six years of gender based data on 38,000 households, men traded 45% more often than women. They earned approximately 1% less per year than women during the study.
A more recent study by SigFig, a portfolio optimization firm, analyzed their clients’ portfolios in 2014. In that year women had a 12% higher median return than men. In addition, men were were 25% more likely to lose money than women. In their analysis, men had turned over the securities in their portfolio 50% more than women.*
When you buy or sell a stock or a bond, you incur a trading cost. If the security is in a taxable account then your profits will be taxed by the federal government and most states. In addition, you hope to invest in a security that will provide a higher return than the one you sold. Interestingly, the Barber-Odean study showed that the security sold actually returned 2% more on average than the new investment over the following year!
During the 2007 to 2009 bear market, Vanguard Funds studied 2.7 million IRA accounts and found that men traded more often than women and were more likely to sell at market lows.
In 2015, Openfolio, an online investment sharing platform, found that women traded an average of 5.1 times versus men at 7.4 times in the year. Additional recent analysis by Betterment, a robo-advisor, shows that women change their asset allocation 20% less often than men and monitored their account 45% less often. In essence, women spent less time managing their portfolios yet they often earn a higher investment return.
Risk: Perhaps it’s the testosterone and other hormones that cause men to feel confident and take on more risk in their portfolios. A study by Fidelity Investments in 2013 discovered that men were more likely to hold 100% of their portfolio in stocks which incur much more volatility than a more balanced portfolio of stocks, bonds and cash.
Studies show that women prefer a balanced portfolio and exhibit more patience then men with their investments, allowing them to grow. Instead of using stock tips which often don’t pan out, women prefer to research an investment before diving in.
While losses are greater in a down market in a stock centric portfolio, gains are higher in a bull market. Theoretically, a higher allocation to equities can benefit investors in the long-term. Of course timing and security selection play a huge part in actual investment returns for anyone!
Men have their strengths of course. Overall, they have a greater knowledge of finance are more comfortable about speaking and studying financial matters. Generally speaking, they earn more than women. Many can calculate their retirement income needs. Hence, it is not surprising that they save more both personally and have fifty percent more money in their company retirement accounts.
Women tend to gravitate toward working with a financial advisor, in many cases because they are less confident in their knowledge of finance and investing. They tend to use professionally managed portfolios, like target-based retirement funds or risk-based funds, in their company sponsored retirement plans, rather than selecting individual funds or securities.
It is not surprising that men’s poverty rate in retirement is significantly lower than women’s. Based upon women’s greater longevity, lower wages or because of taking time off to take care of family, women need to save more. Women should learn more about investing and money management so they can feel confident that they are making decisions in their best interest.
I find in my own practice that women and men often differ in their approaches to investing; educating clients to take the best attributes of what both sexes provide is a winning solution.