The verdict is in: Women are better investors than men.
Actually, the conclusion has been addressed, researched, and reported several times now, going all the way back to Barber and Odean’s “Boys Will Be Boys” study completed in 2001, referencing the differences in investment performance by gender. But the lessons to be learned are evergreen and, as you’ll see, gender-neutral.
One of the fascinating things about Barber and Odean’s research is that they looked not only at the contrast between men and women but the further contrast of single men and single women. As it turns out, the mere proximity of a woman increased the dudes’ investment performance. Men in general, they reported, earned almost 1% less than women per year in their stock-picking endeavors, while single men underperformed their single women friends by 1.44% per annum!
A more recent Fidelity study shows women outperforming men by less—40 basis points or 0.4%—but when compounded over many years, this is still meaningful. For example, someone who invested a million bucks for 25 years at 7.4% would earn $530,657 more than an investor who netted returns of only 7%.
And it’s not just your average Janes and Joes; the male underperformance is also seen among the pros. “The tendency of women to outperform is not only seen in retail investors,” writes Dr. Daniel Crosby in his book, The Laws of Wealth. “Female hedge fund managers have consistently and soundly thumped their male colleagues as well.”
To what can we attribute this meaningful underperformance of male investors relative to their female counterparts? Men rank higher in two notable ways that lead to their lower performance: overconfidence and overactivity. The former, Barber and Odean submit, leads to the latter.
Data compiled by a “large discount brokerage” company on more than 37,000 investor households showed that men traded their accounts 45% more than the ladies. In addition, the single guys traded an eye-popping 67% more than single women.
Here’s the ironic twist: According to a study done by the Spectrem Group, men were twice as likely to rate themselves “very knowledgeable” about investing while women were twice as likely to admit that they are “not very knowledgeable.” Men were also twice as likely to describe themselves as “aggressive” or “most aggressive.”
This helps provide the why behind Barber and Odean’s primary two hypotheses:
H1: Men trade more than women.
H2: By trading more, men hurt their performance more than do women.
Overconfidence leads to overactivity which leads to underperformance.
Yet there is another compelling theme between the lines of the more compelling men-versus-women headline. See if you can spot it in this quote from the “Boys Will Be Boys” study:
“Trading reduces men’s net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women.”
Did you catch that? Everybody—“both men and women reduce their net returns through trading.” Said another way, “Human beings are overconfident about their abilities, their knowledge, and their future prospects.”
This phenomenon—that excessive trading leads investors to make less money than the investments they hold—has also been well documented and dubbed the “behavior gap.”
So, nobody is off the hook! We’re all prone to overconfidence and overactivity, while the evidence seems to suggest that the much quieter traits of humility, patience, and deliberation are those most likely to lead to reward investors, whether men or women.
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