If men are from the risk-on side of the investing universe, then women are from somewhere a little more down to earth. When it comes to ...
If men are from the risk-on side of the investing universe, then women are from somewhere a little more down to earth. When it comes to making investment decisions, gender plays a larger role than many people realize. Women tend to keep the the bigger picture in mind and are not rushed into investments before conducting research or seeking additional help. This can have positive and negative effects on portfolios.
There are three significant ways in which men and women differ on financial decisions, as described in a new analysis by Nelli Oster, director and investment strategist at BlackRock. First, women tend to focus on longer-term, non-monetary goals. Instead of merely viewing money as a means to purchase something, they consider money to represent independence and security. Second, women are more likely to ask for direction on investments. According to a Prudential study, 44% say they usually rely on some input from a professional advisor. In contrast, the majority of men prefer to make financial decisions entirely on their own.
Finally, women tend to be more thorough and take more time to make decisions than men. "Several studies, including a national survey by LPL Financial, show that women tend to research investments in depth before making portfolio decisions, and the process, as a result, tends to take more time," explained Oster. "Women also tend to be more patient as investors and consult their advisors before adjusting their portfolio positioning, whereas men are more prone to market timing impulses. To gather information, women often prefer group discussions to men's more independent learning approach."
Trading less and making more thoughtful investment decisions has monetary benefits for women. A six-year study by two professors, Brad Barber and Terrance Odean, found that men trade 45% more than women, and it reduces their net returns by 2.65 percentage points per year as opposed to 1.72 percentage points for women. The study involved using account data for over 35,000 households from a large discount brokerage.
Similarly, a report from Rothstein Kass released earlier this year found that women-owned or managed hedge funds continued to outperform benchmarks. For the six and a half years ending June 2013, the Rothstein Kass Women in Alternative Investments Hedge Fund Index returned 6%, while the S&P 500 gained 4.2% and the HFRX Global Hedge Fund Index fell 1.1%. A small sample of women-owned or managed private equity funds reported net returns of 14.8% in 2012, beating the Cambridge Associates LLC private equity fund index number of 13.8%.
"Our research shows women-owned and managed funds continue to demonstrate strong performance during what has been a difficult period for many alternative investment funds," said Meredith Jones, director at Rothstein Kass. "Women simply perceive risk differently than men and tend to manage their portfolios accordingly. This results in less performance slippage, a diminished tendency to sell at the bottom, and a more consistent application of their strategies. Over time, these traits can create a meaningful and persistent performance differential."
While women receive several benefits from their investing style, there are some disadvantages to recognize. Oster notes that since women focus on qualitative longer-term goals, they may be tempted to separate their money into more accounts in order to keep those goals well-defined. However, this can distort allocation strategies if one is not careful. Furthermore, many people need to take on a certain amount of risk in order to achieve their financial goals. An extremely conservative portfolio has the risk of longevity and inflation.
"Women who are overly concerned about financial security may predominantly focus on downside protection and not take enough risk in their portfolios, subjecting them to insufficient income in the future," said Oster. "Both men and women should make sure that their investment styles and horizons match their overall financial goals. For women, this may mean taking on more risk. For men, this may mean focusing more on longer-horizon goals, rather than on short-term trading track records."
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