Women may be better investors,
Let me explain the reasons with male confidence
Ron Lieber
Merrill and Lynch are male, Goldman and Sachs are male, Schwab and Hutton are also male. Gordon Gekko is an "alpha male investor", not to mention the "Wolf of Wall Street" Jordan Belfort. Whether hero or villain, winner or loser, real or fictional, these iconic investors are very, very pure males. But this is actually a misconception - because it turns out women are often better at investing.
Evidence provided by Fidelity indicates that over the past 10 years, female clients of the company have earned an average of 0.4% more annually than male clients. This may not seem like much, but over decades it could amount to tens of thousands of dollars, or even more.
"What you learn from this is to invest like a woman," said Lorna Kapusta, head of Fidelity's Women Investors and Consumer Department. This is not the first time researchers have found that women perform better in investing, but what is surprising is that neither women nor men are aware of this—resulting in both sides missing out on experiences that could help them invest better.
Fidelity's analysis covered 5.2 million customer accounts from 2011 to 2020 (some customers have more than one account). The analysis focused on individual retirement accounts, 529 plans, and basic trading accounts managed by individuals (not financial advisors), rather than corporate accounts like 401(k). All investment strategies were included in the analysis: those trading individual stocks and those sticking to mutual funds were both tracked.
The reason female investors achieve higher returns is due to their trading behavior, or more accurately, their "non-trading". Fidelity's female clients trade half as frequently as male clients. Vanguard found similar horizontal patterns when analyzing its managed retirement accounts during the same period. Between 2011 and 2020, men traded at least 50% more frequently than women each year. This high-frequency trading is very detrimental. A classic article titled "Trading is Hazardous to Your Wealth" published in the Journal of Finance in 2000 confirmed by professors Brad M. Barber and Terrance Odean showed that individual investors who traded most frequently from 1991 to 1996 had returns that were 6.5 percentage points lower than the market average. The following year, the two professors specifically studied the relationship between trading and gender in another article titled "Boys Will Be Boys". Admittedly, women also traded excessively; from 1991 to 1997, their trading reduced their annual return by 1.72 percentage points. However, more frequent trading men lost 2.65 percentage points—a difference more than double the gender return gap discovered by Fidelity years later.
Why are men trading so frequently? Professors Barber and Odean attribute it to overconfidence. Where does this overconfidence come from? Neuroscientist William J. Bernstein, who turned his attention to the investment field years ago, believes it is due to male hormones. This hormone presents three problems for investors: it lowers fear, increases greed, and greatly fuels overconfidence. "It's good for muscle mass and reaction speed, but not so much for judgment," Mr. Bernstein said. Insufficient fear may lead you to suffer heavy losses during market downturns because you might invest too much in the wrong investment. Similarly, excessive greed may lead you to take on too much risk. Mr. Bernstein has written many books, one of which is "The Investor's Manifesto". For overconfidence, his advice is to take a self-test: How sure am I about what I am doing? He warns: "In finance, if you are completely certain about anything, you are insane." High-frequency male traders, do you understand?