Men own penny stocks on Mars and women have a money market account on Venus.
At least I think that’s how the saying goes…
Okay, maybe not quite like that but the point is, there are noticeable differences between genders when it comes to investing strategies. Many of these came to light just recently, since for years it was the norm for the men to handle most couples’ finances. As women became a bigger presence in the work force, waited longer to get married and couples began divorcing more frequently, women found themselves solely in charge of their own finances. Once they began to invest, based on their own values and goals, it became evident they (typically) invest much differently than their male counterparts. As an investor, a professional investment adviser and a woman myself, this idea is intriguing to me, so I decided to explore these differences…what they mean…and what to do about them.
Generally, a man’s primary goal is growing the portfolio quickly. Men like to win. Their competitive nature compels them to strive for the next dollar milestone. This can lead them to misinterpreting short-term price volatility as material losses, and respond by inadvertently “selling-low.”
Women, on the other hand, tend to focus on the longer-term non-monetary milestones, caring more about the “life goal” and not the exact dollar amount, such as sending a child to college. While this may prevent them from making impulse decisions during times of volatility, women are more likely to “set it and forget it” and forego making advantageous adjustments over time.
For the most part, men are willing to assume more investment risk than women. What man doesn’t like to think of himself as fearless? An Investment News Survey found female-owned portfolios had, on average, almost 20% more bonds/fixed income investments than male-owned portfolios. It’s not because men are “reckless” or women are “boring”; it’s because of biology. I wrote previously about how biology affects investor mentality, but our ancestors also affect our investment asset allocation.
Men, historically, were hunters and warriors, and brought home the food and vanquished the enemy. Now, they’re hard-wired to provide for the family. This causes them to assume slightly more risk, because at all costs, they must provide. Conversely, women were the caregivers. Because of this, even childless women have ingrained maternal instincts, making them the protector. This causes them to assume less risk, because at all costs, they must protect.
The male competitive nature also colors the investment help they seek. Men typically have a deeper interest in the specific investments they hold and read more extensively about them. This thirst for investment knowledge leads them to believe they can do all their investing on their own. They are more likely to disregard information that conflicts with their ideas (this phenomenon is referred to as confirmation bias). Taken together, this leads men to have a greater confidence with investments, meaning they are less likely to hire a financial adviser.
Since women’s goals focus less on dollar amount and more on life goals, there is a deeper emotional fear of failing. This fear causes them to be less confident than men about their investing acumen. Therefore, women are more likely to hire an investment adviser to guide them through the investing process. This lack of confidence can be a double-edge sword; sometimes leading to intimidation and caution, causing women to continue their journey without an adviser.
So Who Wins?
Based on current data, female-owned portfolios outperform male-owned portfolios in the long-term. Women benefit more from the downside protection than men gain by taking on more risk. But this doesn’t mean investors should pile into “safe” investments for downside protection; it doesn’t mean these female-owned portfolios all met their stated goals; and (sorry, girls) it doesn’t mean women are better investors than men. A successful portfolio isn’t determined by asset allocation, or how much risk is assumed, or even who manages it. A portfolio is successful only if it meets the investor’s goals.
However, not all investors relate to their gender’s typical investor behavior. Some of the most risk seeking investors I work with are women and I know plenty of men who would rather sleep on a bed of cash than be in the stock market. Excluding those extremes, a mixture of both behaviors can be a good thing. As with most aspects of life, working together will likely result in the most success. If we share our learning and methods, we both may win. Both genders can learn something from the other when it comes to investing:
- Look before you leap. Before making an impulse decision, for example in a market downturn, analyze the situation and figure out what your true risk is before acting. Deviating from your long-term plan because of short-term volatility often results in negative consequences.
- Don’t be afraid of risk. You should know your risk tolerance…but understand what is necessary to meet your goal. You may have to accept more risk to get there.
- Know your biases. The first step is admitting you have a problem, after all. Understanding you may have a natural tendency for protection or risk will help you make impartial decisions.
- Ask for help. Not everyone can (or wants to!) manage their own investments successfully. Know when to ask for help from a professional. Is managing your investments too time consuming? Is the size of your portfolio overwhelming? Often, a professional can help you meet your goals and take a lot of stress out of your life.