Today, March 8th, is International Women’s Day. We explore how women invest, to which extent their strategy is different – and sometimes, better – on average than men. The world of finance is not solely at the hands of men anymore, and we are starting to see visionary women like Cathie Wood shaking up the markets.
In this article, we will explore the two sides of women managing money: the personal finance on the one hand, and the professional women fund managers on the other. While women still need to gain confidence in their personal finances, they tend to show better results in the professional world. Why is that?
Key Takeaways about how women invest
- Women are, due to constructed social pressures, less confident than men with their money, leading to a more conservative approach.
- However, they also tend to be less impulsive and trade at a lower frequency, helping them to show better returns on investment.
- In the professional world, women fund managers outperform men-led funds on average.
- Better decision-making skills make for a more thought through stock selection process.
- The risk aversion we witness with women in their personal finances disappears in the professional world.
Women and personal finance
If investing is a great way to grow wealth, it seems than many women still struggle with it, due to lower wages or lack of confidence in their skills. It is truly important to acknowledge this issue, for us to have the same chance of long-term wealth, savings, and financial prosperity.
Women are less confident with money than men
Historically, finances were left in the hands of men. The days where a woman had to have her husband’s approval to go to the bank is not so distant, and this has left a long-lasting mark that will take time to disappear.
A Merrill Lynch study showed that 68% of men felt capable of managing their portfolio, compared to 52% of women (maybe men are just overconfident). In all domains regarding money management, whether it was having the financial skills to save for retirement, assessing oneself to have investment knowledge or to feel comfortable making investment decisions, it was disheartening to see than women consistently felt less confident than men, often by more than 15 percentage points or more.
However, men’s overconfidence can also be a massive disadvantage. It can lead to the overconcentration on a single position or holding a stock too long, behaviors that can destroy more values that market volatility or sell-offs.
Women are more conservative than men
Bulking up your savings accounts or loading up on bonds will not make you rich on the stock market. Stocks offer the best growth potential, as history shows. Nevertheless, it seems that women tend to invest less money than men in stocks.
Women keep 68% of their portfolio in cash or cash equivalents, vs 59% for men, according to BlackRock.
While this may seem safer and prevents from major stock market downfalls, Wells Fargo suggests that women might not have the enough risk in their portfolio to reach a good balance between risk and reward. While a healthy portfolio with a decent number of stocks may generate an average of 7% annually, a bond-heavy portfolio may generate just about half of this return. Assuming a $500 monthly contribution, the difference can reach a quarter of a million over 30 years.
We must also note that they invest less in stocks because of a lower income. Some studies suggested that when the data was adjusted for demographics, there was no major difference between men and women.
Women are less impulsive than their male counterparts
According to a Wells Fargo study, women trade 27% less frequently than men, meaning that they react less to the market volatility. This can also be seen on the average number of logins on their investment portfolio: 3 times a week for women vs 5 times a week for men.
Vanguard also supports this theory, finding that women traded 40% less frequently than men, a trend that has been reported since the early 90s.
As some of you may know, excessive trading may lead to losses: it reduces men’s net returns by 2.65% a year, vs. only 1.725% for women.
Women can show better investment returns than men do
Speaking of returns, while women lack confidence in their investing skills, data shows that it is not justified. On average, Fidelity reported that women outperformed men by 0.4% with their annual portfolio return.
While this may seem like a small gap, it does make a difference over time: $10,000 invested with a 10% yearly return amount to $175,000 after 30 years, while the same amount with a 10.4% yearly return amounts to $194,500.
This trend of women’s portfolio has been seen since the early 90s. A study conducted by the University of California even showed that women’s portfolio even had a return superior by 1% compared to men.
But why these superior returns? Well, where men are more likely to take the risk of speculation, betting on so-called “lottery-style” stocks, women will prefer to adopt a “slow and steady wins the race” style of approach, investing in funds rather than specific stocks. This meant that women had overall more diversified portfolios and typically experienced fewer losses.
Professional women investor
Based on newer research, it was found that women fund managers regularly outperformed their male counterparts. This time, it seems to have nothing to do with risk aversion as some older studies suggested, but more with high quality decision-making skills.
A recent study by Goldman Sachs showed that 48% of female managed funds outperformed the market this year, compared to only 37% for all-male funds. Women-led funds also showed greater resilience during the March downfall last year.
The same scheme was observed from 2000 to 2009, with women-managed funds delivering almost double the performance, and a much higher resistance to the 2008 crisis, falling 9.6% on average vs. 19% for male-run funds. What are the reasons behind this?
Of course, not all studies support this. A Morningstar study was more nuanced, showing that women were better at managing fixed-income instruments (only slightly) and men were better at managing equity funds (but only slightly, as well).
Women have a positive impact on decision-making
Women bring something important to the table when a group needs to make decisions, such as which stocks to buy. They tend to have better listening skills, and the capacity to consider diverging viewpoints and opinions.
This idea is supported by academic research, as it states that the presence of diversity of any kind improves the decision-making quality and comprehensiveness in a group, stopping it from engaging in what we call “groupthink” – when everyone will simply follow the average tendency of the group.
Further research found that companies with women in the top management also performed better. Researchers suggest that women tend to have a management style that encourages listening and sharing, sparking up new and better ideas at a higher frequency.
Women take… more risks!
What? Yes, they do. While this may seem contradictory compared to what we have said in the first part of this article, women are not more cautious in the professional world. On the contrary.
The difference is that the risk aversion difference that has been observed between men and women is a socially constructed one. Women tend to be more cautious because of stereotypes.
When they enter the business world and have more female colleagues, this outside pressure lifts off, they take more risk. This even has a snowball effect in mixed teams: when men see women take more risk, they feel threatened and respond by taking more risk. Seems like both women and men struggle with external social pressures regardless of one's sex.
Conclusion: are women better investors than men?
Well, yes and no. Regarding personal investments, it seems that lower confidence leads women to take less risky positions. They also invest smaller sums of money because of an income that is smaller than men's on average.
However, this is compensated by the fact that they do seem to be more patient and careful, with less trading frequency and overall, better return on investment on their account as they make fewer mistakes.
In the professional world, women-led funds tend to outperform men-led funds, as diversity leads to more quality decision making. It was even found that the risk aversion experience in their personal finances disappears.