Women’s Secret Weapon: why women make better investors than men
Grace Groner’s life did not get off to a good start. Born in 1909 to a rural Illinois farming community, she was orphaned at just 12 years old. However, with support from members of her community Grace managed to attend her local college and secure a job as a secretary. She worked there for 43 years. Grace stayed in the same community her whole life, living in a small, modest cottage. Those who knew Grace described her as pleasant and unassuming. She liked to spend her spare time travelling, attending her local college football matches. She also donated often, but anonymously, to those in need.
When Grace died at age 100 in 2010, her friends were shocked to learn that she left a fortune of over $7 million to support the local college she felt fortunate to go to all those years ago. A look through her finances revealed no tricks; there were no big inheritances or secret lottery winnings. Grace had simply invested just $180 she had left over from her pay checks in the 1930s and let it grow for over 70 years.
Two weeks after Grace died, a man called Richard Fuscone declared bankruptcy. Fuscone led a very different life to Grace. He was a Harvard graduate who quickly made it big on Wall Street. Fuscone quickly worked his way up to an executive position at Merrill Lynch. He lived a lavish lifestyle, retiring in his 40s. Ruined by the 2008 crash, he was forced to sell furniture out of his 14-acre, two-pool mansion just to feed his family. “My background is in the financial-services industry, and I have been personally devastated by the financial crisis”, Fuscone’s bankruptcy filing stated. “I currently have no income.”
What do these two stories tell us? Perhaps that we should try to be a little more like Groner and a little less like Fuscone. Yet the main point is this: Having the best education, world leading expertise, and all the right connections doesn’t guarantee success in the world of investing. In fact, investing is one of the very few disciplines where a simple approach by those with relatively little knowledge can beat the ‘best’ experts the industry has to offer.
Despite this fact, many people, women in particular, remain nervous about investing. This is unsurprising, it is a world full of complicated numbers, jargon-soaked theory, and seemingly more products than an Amazon warehouse. Most people wouldn’t invest if they are not confident they know what they are doing. It can be hard work to get to the stage where you do. However, this doesn’t explain why women appear to be less confident than men. Just one in five women in the UK hold an investment, compared to one in three men.
The Confidence Gap
In their book, “The Confidence Code”, Katty Kay and Claire Shipman document the ‘confidence gap’ between men and women. For instance, studies which ask both men and women to predict the score they got on a test have found women tend to predict they getting a lower score than they achieve. Men, on the other hand, are more accurate, or even overly optimistic, about their results. Unsurprisingly, these studies showed little or no difference between men and women in the performance of tests. Kay and Shipman also describe how women are less likely than men to engage in risky behaviours. These include competing for prizes, applying for competitive job roles or asking for promotion.
The studies the book identify often share common themes. Women are less confident in their abilities than men despite being just as competent. Men, on the other hand, are far more likely to be overconfident. Unfortunately, overconfidence can actually lead to more success in the workplace for these men, while women who may actually be more competent, but less vocal, get overlooked.
Kay and Shipman have done a great job covering both the reasons for and effects of the confidence gap in their book. It is clear there is still much work to do to minimise the confidence gap and its impact in the workplace. However, you may be surprised that when it comes to investing, this difference in confidence and behaviour can actually be to women’s advantage.
A curse, and a blessing
Unsurprisingly, survey data reveals a confidence gap in investing too. This makes women less likely to invest. However, what several studies also show is that women who do invest actually get significantly better returns than men on average. Why? Because less investing confidence, or avoiding the pitfalls of overconfidence, often leads to better results.
A recent study by Warwick Business School found women outperformed the men by a massive 1.8% per year. If that doesn’t seem like a big number to you, consider this: 5% growth of £10,000 over 30 years amounts to £43,220, while 6.8% growth amounts to £71,970. That’s around a 67% difference, more than enough to make up for that pesky pay gap!
Women are even coming out on top among professional investors. For instance, one study looking at the six years to 2013 by consultancy firm Rothstein Kass discovered hedge funds majority managed by women returned an average of 6%, compared to the industry’s loss of 1.1%. Women not only got higher returns over most years, but weathered the 2008 crash far better than most of the men.
What are the reasons for this difference? Another Fidelity study sheds some light on this question. This one found out that investors with inactive accounts actually performed better than active ones. In other words, the best investors were those who had lost their passwords, forgotten they had an account or were dead. The inactive accounts in the Fidelity study did so well because they had simply bought and held investments.
Letting investments grow over time rather than trading in response to hunches, market movements and tips picked up from friends or the news is likely to be a superior strategy. Crucially, women’s lack of investing confidence is one of the reasons their accounts look more like the inactive ones. A HSBC study found women trade 49% less than men.
Calm, informed and level-headed
We are all subject to a number of behavioural biases. This can mean that we are more likely to buy when things are going well in the market (i.e. when prices are high) and sell when things are going badly (i.e. when prices are low). The fact that women trade less means that there is far less opportunity to make mistakes like these, which is great for long term investment growth.
Men are also more likely to prioritise investment returns over the short term. They often see investing as a competition and measure their success in money rather than their progress against their goals. This is an unhelpful attitude. Women, on the other hand, tend to invest towards their longer-term goals, and are more likely to make safer bets to achieve what they want rather than maximising their potential returns.
Men’s confidence with investing can be their downfall. Confidence can increase susceptibility to confirmation bias, i.e. only paying attention to views that agree with your own. Men also rely more on impulse and gut feeling. They are more likely to use aggressive, risky strategies, buying shares or funds with less of a proven track record. Women are less likely to assume they know best, so tend to take research more seriously. They spend more time on average deciding what investments to buy and are more receptive to advice. So much for stereotypes about women being the emotional ones!
If you’ve got it, use it!
Whatever the reasons are for women’s differences from men in behaviour and attitude, it is undeniable that they exist. In some cases, especially in the workplace, they unfortunately put women at an unfortunate disadvantage. In investing too, our lack of confidence impedes us. It makes us less likely to take the plunge and let our money work towards our goals for us. However, I hope you now understand that it can also be one of our greatest strengths.
It is important to address the confidence gap and its affects (Kay and Shipman’s ‘The Confidence Code’ is a great place to start!) Yet we should recognise that traits which cause problems in some areas can be fantastic strengths in others.
Doing your research, not trading so much, not taking on too much risk, keeping the emotions out of investing and your goals in mind are all things we as financial advisers try to teach our (majority male) client base. The fact that so many women already have these tendencies is a huge strength. Perhaps it is time to put these strengths to good use!
If you would like to start investing but have no idea where to begin, I have produced a guide for investment beginners, available here. If you would like to learn more about the gender investing gap, I have written about it here.
Risk Warnings
This article should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm. It does not represent a recommendation of any particular security, strategy, platform or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
This article was produced for educational purposes and aimed at UK residents.
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