By Dale S. Lam, CPA / PFS, CFP®
Summer, 2022, Excerpt from Strategent Financial Wealth Management Outlook 2022
It has been studied for years. Findings consistently show that women are generally better investors than men. What’s more, women are becoming better savers too. Though, it’s how women are choosing to invest their money that appears to make the biggest difference – perhaps with a little more prudence and patience.
The Fidelity Investments 2021 Women and Investing Study, an analysis of 5.2 million retail customer accounts from 2011 to 2020, again showed that women outperformed men with their investment performance. Annualized returns for women were 0.4% higher than men.
The study also showed that women are gaining ground on how much they save too. Outside of their workplace retirement savings, 67% of women save to their after-tax investments, up from the 44% of women doing so in 2018.
So, why are women better investors than men? Most indicators point toward how frequently they trade in their investment accounts. Specifically, how much less they trade. Fidelity found that women bought or sold investments half as much as men. This is consistent with similar findings by Vanguard over the same period of time.
For many years, studies have repeatedly shown how increased trading leads to inferior investment performance. The Journal of Finance in 2000 featured an article titled “Trading Is Hazardous to Your Wealth” which detailed how, “individual investors who traded the most earned an annual return that was 6.5 percentage points worse than the overall performance of the stock market.” The study observed 66,465 households with accounts at a large discount broker during the period of 1991 to 1996.
The same two UC Berkley Scholars (professors Brad M. Barber and Terrance Odean) that authored the above study, did another the following year called “Boys Will Be Boys.” Nearly two decades ago, they found similar findings to what the Fidelity study reiterated last year – looking at account data for over 35,000 households, “men traded 45 percent more than women.” Their reason why men traded more: overconfidence.
Neurologist William J. Bernstein, who studies investing, and has authored numerous books on the topic, has concluded the same. He points to testosterone as the reason for male overconfidence – “it does wonderful things for muscle mass and reflex time but doesn’t do much for judgement.”
There is apparently an inverse relationship between one’s investment performance and their confidence. Coincidentally, and not surprisingly, the Fidelity Investments 2021 Women and Investing Study found just “14% of women say they know a lot about saving and investing,” and only “33% feel confident in their ability to make investment decisions.”
It is important to be confident in your investment strategy and advisor. That is not the same as being overly confident in stock trading and market timing efforts – which clearly can lead to poor performance over time.
Past performance is not a guarantee of future results. Any indices referenced are unmanaged and cannot be invested in directly. See Disclosures.