Men are confident investors and it is leading to lower returns
Want to improve investment returns? Take a page from the way women invest.
I spend a lot of time consuming investing content. And a consistent theme is how a lack of confidence impacts female investors and women who should be investing. This is a real problem. And an issue that has personally impacted me as my mother is one of those women who lacks investing confidence despite her intelligence and career success. We need to work to fix this problem. But this article is not about getting more women to invest. It is about learning from the women that do invest.
There is a flip side to each of these studies that is consistently ignored. To declare women less confident we need a point of comparison. And that point of comparison is men. Men are more confident investors. At face value we accept that as a good thing. We don’t spend a lot of time thinking about the source of this confidence and the ramifications. Is it based on more knowledge and/or skill or is it bluster. Does it make men better investors or does it hold them back.
Men are also more confident drivers. A UCLA study showed that men consistently rank themselves as better drivers than women. And confidence is apparently king. Consuming half a dozen pints is no reason not to drive when you are really good at it. Speed limits are for subpar drivers and just a suggestion for superior drivers. These are examples of overconfidence leading to risky behaviour.
Australian men are 4 times more likely to get in a fatal car accident than Australian women. Men pay more for car insurance than women. Yet the stereotype that women are inferior drivers remains.
I don’t have a car. And I don’t drive that often. I can’t say I spend a lot of time thinking about if I’m a good driver or not. But the chances of surviving a car trip seems to be a decent way of judging proficiency. Women are clearly better drivers.
Is there a downside to being a confident investor?
If the measure of a successful car trip is reaching your destination safely, we can judge investing in the same light. Investing is about achieving a goal – the destination for each investor. And while less women invest it turns out that those who do are better investors than men. According to a study that looked at 5 million Fidelity brokerage accounts over a decade women outperformed men by .4% a year. That doesn’t sound like a lot. But the cumulative effect is meaningful.
Interestingly enough the same confidence that propels more men than women to invest can impact the results achieved from investing. A study from professors Barber and Odean at the University of California titled “Boys will be boys: Gender, overconfidence and common stock investment” explored this very issue. It turns out that men trade 50% more than women. And between 1991 and 1996 the individual investors that traded the most earned an annual return that was 6.5% lower than the overall share market according to another paper by Barber and Odean.
Overtrading is a manifestation of overconfidence. Overconfidence bias refers to investors that have an inflated sense of control and unrealistic optimism. This results in an underestimation of the risk of a situation. It turns out that the human mind – especially the male mind - is really good at ego stroking. If an investor hears about another investor making a mistake the poor outcome is often attributed to their short fallings. But if we make the same mistake ourselves it is often attributed to a factor beyond our control. This is a perfect formula for not learning from mistakes.
We convince ourselves that each new idea can’t miss. And we convince ourselves that we can be nimble and constantly adjust our portfolio to take advantage of whatever short-term market environment is currently occurring. According to the New York Times far more men than women try to make sense of short-term noise.
Overconfidence also impacts portfolio construction. According to the Fidelity study women diversify more by constructing well rounded portfolios. Men tend to overweight their portfolio in the riskiest assets. And while a case can be made that the short-term volatility associated with riskier assets matters little over the long-term it turns out that men don’t tend to hold them for the long-term. Male investors sell shares more in down markets than women according to Vanguard.
What does all this mean?
Anytime we explore gender differences we are obviously generalising. And that can be dangerous. But if we explore the actions and not the gender, we can learn lessons that can make all of us better investors. A bit of self-awareness goes a long way in improving the outcomes in every situation.
Investing is a trade-off between risk and reward. It involves accepting short-term volatility in exchange for the expectation that over the long-term returns will exceed what will be earned by staying in cash. It takes some confidence to make that leap.
But successful investing is accepting the fact that individual investments won’t work out. And that there can be years when a portfolio continues to decline in value. While confidence is needed to start investing it takes humility to accept the unpredictability of the future and take appropriate measures to guard against this uncertainty.
There is a fine line between confidence and hubris. Odysseus was lashed to the mast to prevent the lure of the Sirens’ song. The sailors that succumbed to the “honeyed voices” did not die by chance. They chose to dash themselves against the rocks. They were confident things would be different and took no precautions to prevent an obvious pattern from leading them to their doom.
Establishing goals and an investment strategy keeps the focus on the long-term. Diversification removes single security risk from a portfolio. These are the basics of investing but are frequently ignored.
There are further steps that any investor – male or female – can take to guard against the downside of confidence. The first thing to do is appreciate the value of diversity. And we often define diversity in terms of skin colour, ethnicity, gender or sexual orientation. But the power of diversity is diversity of thinking and viewpoints. That is often shaped by experience. And since this article is focused on gender we can start with how the different experiences of men and women can shape thinking and viewpoints.
Traditional gender attributes shape the way we view investing. Confidence, decisiveness, and a bias for action are traits we assign to both men and to successful investing. This may be anachronistic but it is hard to argue it doesn’t exist. It is also hard to find any evidence that these traits lead to successful investing outcomes. In reality we make better investment decisions when we seek out and embrace a diversity of opinions. That provides for more thoughtful and considered decision making. It prevents us from constantly churning our portfolios. It is the investing equivalent of lashing yourself to the mast.
One way to get a diversity of opinions is to simply manage finances jointly as a couple. Take advantage of the diversity of experiences and opinions in your own household. If you are not in a couple seek out other opinions. Especially opinions that contrast with your own. Minimise turnover as overtrading is a terrible idea for any investor. Maintain some humility that no matter how much confidence you have in an investment anything can happen.
Writing about gender typically generates a lot of opinions. I want to hear yours at email@example.com