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Investing battle of the sexes – why women win

THERE ARE A LOT OF FACTORS that determine how good a person is at investing. One of them, it turns out, may be gender. A fairly large body of research has shown that women, although they tend to be less confident, are likely to be more successful investors than their male counterparts (ceteris paribus, of course).

Consider, for example, a study from the Quarterly Journal of Economics that looked at the impact over trading on investment returns. The researchers noted that over-trading is one major reason why investors tend to underperform benchmarks. They further noted that research in psychology has shown that men tend to be more overconfident about their abilities in finance than women. They therefore theorised that women would trade less than men, and thus would deliver higher returns.

The researchers studied data for 35,000 households with accounts at an online brokerage firm, and found that men did 45% more trading than women. The net result was that trading in and out of stocks reduced the men’s returns by 2.65 percentage points, and the women’s by only 1.72 percentage points (the difference was statistically significant). In other words, women in this study seem to have escaped the overconfidence trap that leads to too much trading and reduces returns.

This finding was echoed by a study from investment management group Vanguard. Vanguard looked at how investors responded to the equity crash of 2008/9, and specifically, at what kind of investors tended to sell low. Among their findings, they found that men were 10% more likely than women to sell out of their equity holdings at the bottom of the market. As we all know, selling low and buying high is a pretty bad strategy for equity investors. By holding onto their stocks though the market low and perhaps increasing their equity holdings, women would likely enjoy higher long-term rewards than their male counterparts, who allowed fear to get the best of them.

Another study from KPMG looked at women who manage alternative investment funds like hedge funds and found that an index of alternative investment funds run by women, the Rothstein Kass Women in Alternative Investments (WAI) Hedge Fund Index, outperformed both the HFRX Global Hedge Fund Index and the S&P 500 (see the table copied from the KPMG report below).



Although this variation is due, in part, to the fact that women tend to run smaller funds than men, and that smaller funds tend to perform better than large ones, this does not account for all of the outperformance. Instead, women hedge fund managers seem to be doing something else to explain their successful performance. Their funds achieved a higher Sharpe ratio than the HFRX and the S&P, indicating that they have delivered returns with less risk than their peers. Perhaps, then, the difference in performance can be explained in part by a different attitude towards risk.

Now, as is always the case, this all comes with caveats about correlation, causation, and the limitations of any and every piece of research out there. However, there does seem to be evidence that, on average, women have some advantages as investors. Happily, they are the kind of advantages that everyone, regardless of gender, can cultivate. Specifically, there is evidence that women are better at avoiding some of the mental traps that lead to poor investment returns.

First, women seem to be able to avoid the perils of self-enhancement, at least when it comes to equity investing. As I’ve discussed before, self-enhancement is the tendency humans have to think that they are better than average at a whole host of things. When it comes to investing, believing that you are a better investor than everyone else can lead you to make bad calls like too-frequent trading. Remember, odds are you’re just about average as an investor, so develop a solid strategy and stick to it. You’ll be better off.

Women also show some signs of being better able to resist the human urges of loss aversion and herding – the tendency to fear losses more than to desire gains and the tendency to do what everyone else is doing (these are the psychological habits that lead to selling low). Once again, you can emulate this by building a good, balanced, diversified portfolio, developing an investment plan, and sticking too it even if it’s stressful at times.

Bottom line: to the extent that it’s true that women are more successful investors then men, it is because they may be better at avoiding some well-known psychological and behavioural traps. Which means that anyone can be a better investor by doing the same.
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