Many articles have been written lamenting the fact that women are less likely to invest in the stock market than men. However, several recent studies (Financial Times April 2019) suggest that women who do take the plunge outperform men when it comes to investment returns.
So why don’t more women invest? Public perceptions of women’s investment prowess are much less positive. A lack of role models could be an issue — there are fewer high-profile female investors and, historically, fund management has been a notoriously male-dominated industry. Women have money to invest, but they tend to prioritize cash savings, and are more risk-conscious.
Men are more likely to be overconfident in their ability to actively manage a portfolio. That makes them believe they control chance outcomes more than they really do. This mentality often leads to over-trading and higher transaction costs that dilute performance.
Another factor relates to how each gender responds to momentum swings in the market. Every investor reacts differently to losses and gains. But an overconfident investor will often feel an extra urge to buy more in good times to capture more gains, or sell more in tough times to prevent future losses.
However, buying and selling because a person feels compelled to “do something” – or just because they're overconfident in their abilities – ensures subpar performance over time. Men tend to be more vulnerable to such impulsive behavior, on average.
Most women believe they have unique investment needs and challenges. By the end of 2020 American personal wealth controlled by women will swell to about $22 trillion. Women are set to inherit over $28 trillion in intergenerational wealth transfers over the next 40 years (Market Watch May 2017). Women also control significant spending and financial decision-making, and almost all women are sharing in or primarily in charge of financial decisions, Women drive the major majority of all consumer purchasing in buying power and influence, and two-thirds of women over 50 years old share in decision-making with their spouses.
Key observations about women as investors:
- Women tend to be more risk-averse. Women statistically play it safer than men. They are less likely to run yellow lights, and they are more likely to wear their seat belt and get their blood pressure checked.
Perhaps it’s no surprise that this prudence extends to their investments. Surveys have found that women are eager to avoid large losses and are less inclined to act on incomplete information.This risk aversion is partly due to emotional differences. Men tend to display anger in the face of negative events, while generally women are more likely to feel fearful. This contributes to feelings of uncertainty, and it may lead female investors to be more conservative.
- Women are less confident about their finances. Men are often self-directed learners and like to do their own research. Women, on the other hand, tend to prefer a more social learning experience, but they don’t always get a social element when it comes to personal finances.
Talking about money is still considered taboo. One survey found that most women were less likely to talk about finances with friends and family than other sensitive topics such as health or work issues.Taking too much risk can lead to needless losses, but total risk avoidance can result in missed opportunities.
- Women are less likely to own stocks. Women keep a full 71% of their assets in cash, whereas men hold 60% in cash, according to a survey by BlackRock.
Women already face unique obstacles in wealth accumulation such as the gender wage gap, less financial education, and more lengthy and frequent career breaks to care for children or aging parents. A hesitancy to invest can make the situation worse.
- Women are underrepresented as portfolio managers.The ratio of men to women mutual fund portfolio managers is nine to one. Progressive investment firms are working on promoting gender diversity and increasing the awareness of unconscious biases.
- When women do invest, they tend to perform better. The average male investor tends to be more confident and trade more often, whereas women are more likely to buy and hold. So that even when women make dubious selling decisions, they do it less frequently, minimizing the negative effects. Women often stay focused on their long-term goals (retirement, funding college education, etc.) rather than a benchmark, and stick to a plan.
Nearly 90% of women will be solely in charge of their own finances at some point in life—and that number will only go up as women delay marriage, divorce more, and often outlive their spouses. It is vital for men and women alike to be fully aware and in control of their investments.
¹Manning & Napier March 2019
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.