Why women make better investors
There is evidence that women make better investors and the reasons for it can be a useful lesson for all who are saving for retirement or otherwise dabbling in the stock market.
A few friends and colleagues of mine – private investors who write about investing for a living – rue the fact that their wives' investments do better than their own. This probably isn't an unusual story.
A few other people I'm acquainted with say that they run their wives' portfolios for them, and they do so how they think their wives would like them to. After many years, they have helped their wives kick their own butts at investing.
I've met several men who have lost everything, or almost everything, betting all their money on one dodgy company – and I'm including Royal Bank of Scotland in that remark! I can't think of any women who have done that.
Obviously, this is a generalisation, so it won't always be true. One woman I knew was a dreadful investor, who bought based on the seasons instead of based on the merits and price of the company.
But there have been various studies along this theme, and some even show that it's the same with professional investors. A report by Hedge Fund Research found that women hedge fund managers made 75% more money for their clients than their male counterparts over a ten-year period.
What's the difference between men and women
Tests on the effect of testosterone levels have shown that the higher they are, the more emotional investment decisions are made, and the less rational. As you know, men usually have more testosterone.
This leads to rash decisions, which can become even more costly when panic takes hold. In particular, it leads to heavy bets based on less analysis. It leads to hot-blooded, reckless competition. It leads to buying expensive holdings. It also leads to buying and selling more frequently.
The costs of overcoming expensive trading are extremely difficult to overcome. Male private investors appear to spend about one percentage point extra per year on investing costs compared to women. This means that men's investments need to rise by around one third more than their wives' investments over 30 years merely to do as well as them. Most men can't do this, despite their self belief and intelligence.
The wives I mentioned previously, and the acquaintances who select portfolios the way their wives would, all do the same two things. They invest in a “boring” way (their words, not mine) while the husbands invest more adventurously.
How do women do it?
These women all invest regularly, ignoring the euphoria and woes of the stock market – especially from news reports and “expert” commentators – and just put up the same sums of money, month in, month out (or sometimes quarter in, quarter out).
This prevents panic and greed from making you buy high and sell low. At the same time, it means they buy more stock when prices are lower, and less when prices are higher. If you invest £100 this month and the stock market falls, next month, you'll buy more shares for your £100. Since the stock market rises in the long run, you should expect to do well from such stock market falls in the end.
That is, providing you keep your costs down, which is what these women do. They all invest cheaply either in big, solid companies, or they invest in index trackers.
It's usually cheaper to invest in big companies rather than small ones, because of something called the spread. This ensures that when you buy, you pay a higher price than you'll get when you sell. Buy 100 shares in a company and sell them immediately, and you will have lost money thanks to the spread – even before your broker's commission is deducted from both transactions.
Index trackers are a fantastic way to invest cheaply in the stock market. They are more suitable for most investors than trying to pick the right large companies to invest in. I wrote about these in Two simple ways to invest better in shares.
Anyone who regularly puts cash into one of the cheapest FTSE 100 or FTSE All Share trackers can expect to outperform most fund managers – male or female – in the long run, and probably an even higher number of private investors.
You will also do so very safely, since your money is spread across a great many businesses, many of which get a large portion of their profits from foreign countries, and include businesses profiting from commodities, pharmaceuticals, engineering, property and many more (Yes, even banks.)
Love's got nothing to do with it
Having worked with many male investors, I can say it's clear that many don't take the costs of their actions fully into account. They buy and sell like crazy, and even the most rational appear to fall in love with their best ideas.
The most successful investor in the world, Warren Buffett, is often said to invest like a girl. If all the above is true, he certainly does. He buys great companies very carefully, very slowly, and then he just holds on to them to keep his costs down.
Always ready to teach us how to avoid insanity and expensive money managers, he has recommended index trackers to the majority of investors. He has also said that he seeks to destroy his best loved ideas, not preserve them.
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