Women underestimate their abilities, are risk-averse and—broadly speaking—are less confident than their male counterparts, according to a landmark study by Tahira Hira of Iowa State University and Cäzilia Loibl of The Ohio State University.1 Yet it’s these very qualities that can give them an edge as investors.
Moreover, men and women earn roughly the same returns, report Brad M. Barber and Terrance Odean of the University of California, Davis; however, women do so with considerably less risk.2
So, what can we all learn from the way women invest?
Trade less often
Long-term investors who trade too frequently may incur higher costs and risk mistiming the market. Indeed, Barber and Odean found that men trade 45% more than women—and that trading reduces their net returns by 2.65 percentage points a year, compared with 1.72 percentage points a year for women.
Do your homework
Because women frequently harbor doubts about their financial savvy, they tend to more heavily research their investments. According to Hira and Loibl, 79% of women described themselves as wanting to know all the details, compared with 73% of men.3 Due diligence doesn’t guarantee success, of course, but it does result in more-informed decision-making and fewer surprises about a bond’s, fund’s or stock’s fundamentals.
Risk aversion can lower returns, but excessive risk-taking can do real damage to your portfolio. A majority of women in Hira and Loibl’s study preferred taking “average or below-average” investment risks, whereas about half the men preferred taking “above-average or substantial” risks—making women more likely to diversify and less prone to put too much into a hot stock or market bubble.
The bottom line: A more measured approach to investing can help make better investors of us all.
1Gender Differences in Investment Behavior, 08/31/2006.
2“Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” The Quarterly Journal of Economics, 02/2001.
3Gender Differences in Investment Behavior, 08/31/2006.