Last week, we had a trio of male-female dynamic articles about employment after the Great Recession, households with female breadwinners, and the effect of changing industry dynamics on the male-female balance in the workforce. We aren’t done with breaking down the male-female wall quite yet, however: today we’re going to discuss female investors… and their alpha over the males.
It turns out that, compared to men, women often under-rank themselves in their investing ability. Men, on the other hand…
The Difference in Male and Female Investors
That (hyphenated) word I used – ‘under-rank‘ – was it fair to use?
Of course, that word implies that there is basic parity between the sexes with investment knowledge (or men know more about investing and still over-rank themselves). So yes, it’s a loaded word, but I doubt that the disparity in degree choices completely accounts for the differences observed between the sexes in the survey. That means you’re left with two explanations – men are informally learning more about investing (books? TV?), or there is a fundamental difference between the sexes which makes men overconfident.
I’m going with the latter theory.
Shockingly(!), men have 10 – 20 times more testosterone than women, which factors in a lot of areas – but for the purposes of this piece, note that testosterone has a huge effect on risk tolerance (on that particular study, hat-tip goes to this guy). Testosterone’s effects are well known – its effects show up everywhere from decreased life expectancy for males, to differing career choice, to increased musculature (note that the effects of steroids on female athletes are much more pronounced).
Of course, that also applies to investing. The USA Today report showed 40% of men solely control or take the lead on finances, compared to just 29% of women (the rest of responses claim neutrality – no word on who hits the ‘trade’ button!).
So, the survey (plus a few other stats plus biology) tells us:
- The majority of money in the market is controlled by men
- Men take more risks.
The Practical Implications: Ask Your Wife First (Or another Female Investor!)
One potentially surprising result we already linked in an article? Female hedge fund managers outperform male hedge fund managers. Right; there are potential forms of bias here (“men run more funds with bigger balances, limiting choices” comes to mind… or “the profession is biased so women that make it are necessarily better performers”). However, it’s much harder to come up with reasons why this second result – that female investors outperform males in general – is biased.
What causes it? Is it a self-limiting effect, where if more females invested (and ‘became’ the market, so to speak) the effect would disappear? Do males take the reins in households where both wives and husbands have equal experience and knowledge… dragging down the average?
The point isn’t that females will always outperform males… no. Just like the statement “males are on average 3 inches taller than females” doesn’t mean every male is taller than every female, a member of either gender’s advantage in experience, knowledge or innate skill might make them a better investor.
All we can say? On average, females who invest beat males who invest… full stop.
The Key Takeaway: Female Investors Often Outperform
Does that mean that either males or females should toss over control because of the results of one study? Well, no, of course not – like I said, you need to fairly evaluate your own skill and experience level and beware of the overconfidence that makes you do silly things.
What I’m saying is that if you’re new to investing and you harbor any doubts (and you’re a married male) – don’t drown the thoughts. Ask your wife what she thinks.
And if you don’t know if you’re still a beginner? Ask your wife about that too.
Who runs the investments in your household? If you’re married or in a long term relationship, do you both buy-in before major investment moves? Purchasing decisions? Did you expect female investors to do better?