why women are better at investing

Why Women are Better at Investing

Do Women Make Better Investors than Men?

 

Women, on average, are better investors than the alternative. Of course, such a generalization is not universally true, but what can we all learn by studying “female alpha?”

It is relatively straightforward to study that women are better at investing than men (you just look at geometric returns and the sex of the account owner). What is more difficult, truly, is understanding why women make better investors than men.

What is it about being a female and an investor that provides superior results? In short, what can we learn about women as investors that will helps everyone invest better?

Make sure you read the end where we discuss the most important factor!

 

Are Women Better Investors?

The data are not a slam dunk that there is female alpha. Some studies clearly show superior returns from female account owners (up to 1% a year), while other studies do not.

Regardless, there is a general consensus among folks that women are better at investing. If that is the case—why?

What is it about being woman that might make for better decisions? After all, we know behavioral investing is the way to get better returns—are women better behavioral investors?

Let’s look at some putative properties of females and discuss how these can provide female alpha.

 

Why are Women Better Investors?

Here is a list of what makes women better investors:

  • More risk averse
  • Better self-control
  • Trade less frequently
  • Less overconfident
  • Better educated
  • Follow advice
  • Better savors
  • Less prone to selling during volatility

 

Let’s hit on some common themes and discuss.

 

Women Have Better Savings Rates

Early on, it doesn’t even matter what kind of investor you are, it is all about the savings rate. Women have a higher savings rate than men, and they participate more frequently in employer-based retirement plans.

Some data indicate that women have more cash than men in their portfolios, but a high savings rate and high participation rate overwhelm the cash drag, at least initially.

 

Women are More Risk Averse

Is this such a bad thing? Women have less risk-seeking behavior than men do. This is clearly a “just-so” story from the evolutionary perspective, but can still be seen in many facets of modern-day life.

Avoiding excessive risk is a good thing! Taking an appropriate amount of risk is key, as if you commit the cardinal sin and sell low, all is for naught.

Women are less prone to sell during volatility because they are more likely to take the appropriate amount of risk initially.

They trade less frequently and have better self-control than their male counterparts. It is clear that the average investor does not get the average returns of the stock market, because they buy high and sell low. Females have less of a tendency to do so, and the female alpha likely reflects getting closer to more average market returns.

Women are not more risk-averse, they are more risk aware!

 

Women are Better Educated and Follow Advice

Enough said. Women will educate themselves about products and systems before taking action, and they will seek advice more often than men. While bad advice can be the costliest advice out there, being invested rather than being in cash is important.

 

Finally: The Most Important Factor! Less Overconfidence

I wanted to save the most important factor for last.

Women are less overconfident than men. While this is related to being more risk averse, there are important considerations.

First off, the implication (which is true) is that men are overconfident. As far as behavioral biases go, one of the most devastating bias is that over overconfidence.

The stock market is full of overconfidence. In fact, any time you make a trade you are betting that a stock will do something, but the person on the opposite side of the trade is better that the stock will do the exact opposite! Every time you do something in investing, you are betting that you are smarter than the other guy.

If women trade less often, they know it is because they are not smarter than the other guy! Same thing with aversion to risk, better self-control, and not selling during a panic.

Women are not underconfident, they are just less overconfident!

Let’s explore the difference, because I think this is the real cause of female alpha.

 

Women are Not Underconfident, Just Less Overconfident!

Data shows that women are less confident in their investing ability than men, though investing confidence increases with age.

In fact, women can be downright self-depreciating when it comes to investing. But is that expressed self-confident important? No! What you say about your confidence level is not important, it is what you actually do about it.

Don’t ask a women if she is confident about her competence, watch how she behaves when making investing decisions. From a behavioral investing standpoint, women get invested, stay invested, and keep an appropriate level of risk. All big wins.

Just as impostor syndrome is more common in women, the Dunning-Kruger effect is more common in men.

Remember, while everyone thinks they are an above average driver, most also think they are a below average juggler.

Self-reported competence has everything to do with how difficult the task is. The easier the task, the more people who think they are above average at the task. The more difficult the task, the more people tend to think they are underaverage.

For women with the Imposter syndrome—everyone would have difficulty with the task, but women tend to underplace themselves as to think they cannot do it as well as others. Any capable person struggling with a difficult task.

For men with the Dunning-Kruger effect—well, one just hopes that with time they realize that being good at something actually is more difficult the better you get.

Overconfidence is pernicious and an error of commission. Underplacement is less, and one of omission.

For more on Overconfidence and Underplacement, read Perfectly Confident: How to Calibrate Your Decisions Wisely by Don Moore

 

Summary: Do Women Make Better Investors than Men?

Remember, if you are optimistic that you will be a good investor (vs pessimistic) you don’t perform any better! Competence is important in determining the outcome, regardless if you are over- or under-confident.

Women are underconfident compared to men, but more competent investors. The female alpha is alive and well, and all investors can learn from successful women investors.

Stock picking, market timing, economic forecasting… etc… all show little to no ability to be done better than average. All are, however, staples of discussion regarding performance on the stock market. Strutting like a peacock just means that you are overconfident, not competent. That no one can be competent with these chaos-based indicators leaves women, who are less overconfident, as better investors.

So, what to do to be like women and be a better investor? Women are expected to control 66% of the wealth by 2030. Boards of publicly traded companies that have a least one women on them do better than boards without female representation. Despite earning 20% less, women have higher savings rates and retirement plan participation than men. In 2020, women made about $0.80 for every dollar the average man earned. Women reach their peak earnings at the age of 44, earning an average of $66,700. Men, on the other hand, reach their peak earnings at the age of 55, earning an average of $101,200.

And in the end, women have a ~$1M lifetime earning gap, and are 80% more likely to face poverty in retirement then men. They die later (increasing longevity risk), and have a higher likelihood of requiring long-term care.

What to do to be more like that? Well, I’m not going to solve any of the problems that women face in this world.

I am, however, going to invest like a women.

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