Sheryl Sutherland finds that overconfidence and overactivity holds back investment returns by men. With a rational integrated team approach, the whole becomes greater than the sum of the parts.

By Sheryl Sutherland*

“The battle of the sexes has no place between the sheets…It’s no longer possible for one sex to be the guardian of all financial knowledge.”
– Victoria Felton Collins

Let me mansplain this, keep it simple; when the battle of the sexes enters the world of investments, women win. A study by Barber and Odean, quaintly entitled “Boys will be boys” showed that over a six years study the portfolio selected by men returned less than those chosen by women – it is not necessarily that women pick better companies to invest in, but women don’t trade the same way men do. Men trade over 45% more than women.

The study found that women’s portfolios gained 1.4% more than that of men. In fact, single women did even better than single men gaining 2.3% greater return on their portfolios. Another 10 year study of investment clubs showed the same trend. All female clubs outpaced all male clubs by almost 4% annually. What are women doing that is different? There are several key aspects of women’s investing behaviours that have been viewed as negative or emotional in the past, but are now seen to be of value.

One of the fascinating things about Barber and Odean’s research is that they looked not only at the contrast between men and women but the further contrast of single men and single women. As it turns out, the mere proximity of a woman increased the dudes’ investment performance. Men in general, they reported, earned almost 1% less than women per year in their stock-picking endeavours, while single men underperformed their single women friends by 1.44% per annum!

To what can we attribute this meaningful underperformance of male investors relative to their female counterparts? Men rank higher in two notable ways that lead to their lower performance: overconfidence and overactivity. The former, Barber and Odean submit, leads to the latter. Here’s the ironic twist: according to a study done by the Spectrum Group, men are twice as likely to rate themselves “very knowledgeable” about investing, while women were twice as likely to admit that they are “not very knowledgeable.” Men were also twice as likely to describe themselves as “aggressive” or “most aggressive.” This helps provide the why behind Barber and Odean’s primary two hypotheses:

H1: Men trade more than women.

H2: By trading more, men hurt their performance more than do women.

Women look at more than the numbers. They make investment decisions based on personal life experiences. In choosing an investment they consider issues such as the quality of the company’s products, or their personal buying experience, remember it’s been well documented that women make 80% of the purchasing decisions. Furthermore women have lower levels of self confidence relating to issues such as math anxiety from teen years inhibiting making decisions to sell.  

Women are also more concerned with ethical behaviour. Over 60% of investors in ethical companies are female. Ethical companies tend to have better long term prospects than those who don’t have a holistic approach to business. Women also take less risk than men which influences a buy and hold strategy rather than that of chasing a profit. Lastly, women are less likely to act on a hot tip and take 40% more time researching their investment choices.

When investment are made, men and women incorporate their personal beliefs and attitudes into their investment decisions but styles can become fixed; financial success can become thwarted b a lack of attention to comfortable patterns of behaviour. An examination of the male or female investment characteristics may point to the reasons for success, or lack of success in return. For example, it is clear that male overconfidence compromises investment returns, whereas a female fear of risk may lead to lower returns.

Although the returns from women’s portfolios exceed that of men, women and men could do better through blending their personal investment styles.

No one style is best – there are times when it is best to take risk, as there are times when it is best to be conservative. Successful investing is about balancing tendencies to make the most effective investment decisions. The message? Maintain your unique financial outlook, through utilising male and female styles you can develop a rational integrated approach – the whole being greater than the sum of the parts.

The most surprising thing about this phenomenon is that neither men nor women seem to be aware of this and deprive themselves of knowledge which could help both genders better. But wait, there is more; in my day job there is not one company who takes this into account when educating advisers or preparing marketing material for prospective clients. Especially around risk and return - more on that another day!

*Sheryl Sutherland is director of The Financial Strategies Group, and author of Girls Just Want to Have Fund$ – Every Women’s Guide to Financial Independence, Money, Money, Money Ain’t it Funny – How to Wire your Brain for Wealth, and co-author of Smart Money – How to structure your New Zealand business or investments and pay less tax. You can contact her here.