The Evidence-Based Investor

Why women handle market corrections better than men

Posted by Robin Powell on September 10, 2015

Plenty of progress has been made over recent decades on sexual equality in the workplace, but there is one sector of the economy that stands out as the last great bastion of male domination. It’s the investing industry.

Recent studies show that only a tiny fraction of mutual funds and hedge funds are managed by women. Fewer than a quarter of Certified Financial Planners in the US are female, and in most other countries the proportion is even smaller. Evidence also shows that although men and women tend to share financial decisions generally, investing decisions specifically are made overwhelmingly by men. 

What makes this curious phenomenon all the more alarming is that, time and again, research has shown that women make better investors than men — and that includes professional investors. The seminal study on this subject, conducted by Terrance Odean and Brad Barber at the University of California, concluded that although men trade 45% more often than women, their average annual risk-adjusted returns are 1.4% smaller.

This does seem odd given that surveys also show that women admit they know less about investing and are less confident making investment decisions than men. So why should this be?

There are probably many contributing factors. Generally, for example, women tend to be more cautious than men, and less competitive. Once they’ve thoroughly researched a subject and decided on a plan of action they’re often better than men are at sticking to it; and they’re not as likely either to follow the herd.

But for me, it’s during times of market volatility like these, when individual markets can go up or down by 5% or more on a single day, that the female approach to investing comes into its own.

Recent research by the US robo-adviser Betterment shows that, most of the time, male and female customers actually behave remarkably similarly. However, women are far more likely than men to stay the course when volatility strikes. They are 45% less likely than men to sign into their accounts to check how their funds are performing, and they change their asset allocation 20% less frequently.

Betterment also found that male customers were far more prone to “erratic behaviour”. For instance, men were six times more  likely than women to dump all their stocks or all their bonds in one go.

Again, why this should be makes for fascinating discussion. There are those, for example, who put it down to biological differences between men and women. A recent international study showed that increased testosterone levels can cause male traders to become over-confident and take on more risk, especially in stressful and competitive situations.

I’m no scientist, but my view, for what it’s worth, is that the single biggest reason why women deal with volatility better than men is probably a psychological one, and it’s this. Faced with a problem — any problem, be it financial uncertainty, a stroppy teenager or anti-social neighbour, for example — we men like to do something about it, to take action. Women, on the other hand, often just want to talk about it. They want support and reassurance.

There are millions of investors all around the world who need some support and reassurance just now. Almost invariably, doing something is precisely what they have to avoid at all costs.

So, chaps, if you’re ever tempted to make major changes to your portfolio, and you don’t have a female financial adviser, try talking to your other half. Trust the research: she’s probably better in these situations than you are.



Copyright © 2015 The Evidence-Based Investor

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Robin Powell

