By Dale S. Lam, CPA / PFS, CFP®
April, 2014, Excerpt from Strategent Financial Wealth Management Outlook 2014
Why invest like a girl? Because females generally possess traits that make them better at investing than their male counterparts. Author LouAnn Lofton, who penned the catchy title above for one of her books, notes that for men, stock picking is often about one-upmanship and bragging. Lofton’s reference to Warren Buffet is a headline catcher given that Buffet, age 83, is generally regarded as one of the world’s most successful investors, with a net worth approaching $60 billion.
“With men, too often investing is all about keeping score. It’s a macho thing,” Lofton says. “They’re looking for hot stock tips to get the quick win and then talk about it.” Additionally, men hold onto their losers a lot longer than women. They’re sure the stock will come roaring back – even as it sinks.
The study of how and why people make financial decisions is called behavioral economics and much research in this area helps explain our actions, which are often irrational, and our performance. Legitimate marketers, con artists and stockbrokers make lots of money off our irrational behavior. And a load of research in behavioral economics suggests that a man’s portfolio and pocketbook would be a lot better off if they listened more to women.
Terry Odean, a University of California professor, has studied stock picking by gender for more than two decades. A seven-year study found single female investors outperformed single men by 2.3 percent, female investment groups outperformed male counterparts by 4.6 percent and women overall outperformed by 1.4 percent. Why? The short answer is overconfidence. Men trade more, and the more you trade, typically the more you lose – not to mention running up transaction costs.
“In our research, male investors traded 45 percent more than female investors. Men are just making a lot more bad decisions than women. More trading leads to lower performance.”
Terry Odean, University of California
Bad financial decisions often can be traced back to unwarranted optimism, or the “positivity illusion” that things are going to turn out just right. On paper it sounds good – better to be hopeful, right? Not so fast. This tendency clouds critical thinking.
Con artists love men, particularly well-educated, optimistic, overconfident ones who think they’re too smart to be taken. These guys are the easiest mark for the crook, according to the FINRA Investor Education Foundation. Gerri Walsh, its president, is an expert on investment fraud and behavior.
“Studies show men tend to be overconfident and less likely to seek another opinion,” Walsh says. Women, she adds are “less excited” about investing. All this leads to less of a gambling mentality among women and makes men more vulnerable to a fraud pitch.
So what are men to do? “Ask and check,” Walsh says. “Develop a plan. Stick to it. And ask questions.” She adds that men are more impulsive investors – so having a plan makes it easier to dial back on emotional investing. Lofton’s remedies are more challenging to certain men, because they involve listening. And not the kind of “yes, dear” head-nodding while watching SportsCenter’s top 10 plays. “If the man is lucky enough to have a wife or girlfriend, bring them into the discussion, share the decision with them. Women will tamp down some of the crazier risk,” she says. Legendary Fidelity fund manager “Pete Lynch involved his wife and daughters in a lot of decision making, and he did pretty well,” she says.
Past performance is not a guarantee of future results. Any indices referenced are unmanaged and cannot be invested in directly. See Disclosures.