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Why Women Make Better Investors

Overconfidence, frequent trading can be your enemies

Women better investors

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When it comes to financial investments, women may have the upper hand in the stock market.

It's true: Overall, women are better investors than men. Let's examine why and learn how anybody can be successful at investing, irrespective of gender.

Boys will be boys

One of the most famous investment studies was titled "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment." This study, published in a 2000 edition of the Quarterly Journal of Economics, was conducted by Terrance Odean of the University of California, Berkeley, and Brad Barber of the University of California, Davis.

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Odean and Barber examined the stock-trading patterns of men and women, and found that men traded 45 percent more than women. Due to the fact that trading reduces returns, the study determined that the average return for women was reduced by 1.72 percentage points annually because of trading activity, while the men's performance was reduced by 2.65 percentage points. Thus, women outperformed men by nearly a full percentage point.

Curiously, the difference was even more pronounced when comparing single women to single men. Single men traded 67 percent more than single women, allowing single women to outperform single men by 1.44 percentage points a year.

Odean and Barber tested several hypotheses to explain the difference but ultimately settled on the explanation that men have been shown to be more psychologically overconfident than women. Overconfidence in one's financial acumen leads to more trading, which leads to lower returns.

I asked Odean if any updated work had been done, and he pointed me to research underway on the effects of testosterone on investing performance. The study is being conducted by Amos Nadler of the Ivey Business School at Western University in Ontario and colleagues from the California Institute of Technology (Caltech).

Nadler told me that "using a popular testosterone medication, we show that higher testosterone negatively affects cognition and drives overbidding for financial assets." This work has not yet been published. So perhaps it's the testosterone we men have that drives our overconfidence.

Women and investing simplicity

The "Mars/Venus" investing dynamic noted above is something I have often observed in my financial planning practice. For instance, women generally embrace the wisdom of indexing more easily than men. As I explain the dismal odds of an active portfolio beating a low-cost diversified indexed portfolio, I see more nods from women.

Men, on the other hand, can view indexing as a guaranteed way to underperform the market, even if only slightly. Many cannot accept that what they believe to be logical is actually emotional. Whether that "logic" is careful research or the latest widely held view, it still comes down to our pesky emotions leading us astray.

In short, men are more overconfident in their abilities to pick investments or at least to pick the right active investment advisers. And they typically resist the notion that technical analyses and market newsletters are merely noise to be ignored.

Women seem to be able to tune out the noise and recognize that indexing is a guaranteed way to outperform the vast majority of investors. Much like their willingness to stop and ask for directions, they appear to readily accept that they know they don't know what the market will do or what the next hot investments will be.

Lower levels of overconfidence help women accept the simplicity of owning a global index portfolio and doing some occasional rebalancing.

My advice

I'm not trying to pick on my own gender, especially considering I lean toward overconfidence as much as the next guy, though I express it in other ways. As it happens, neither gender is immune to displaying overconfidence in investing; it's just that my gender tends to succumb to it more frequently.

Regardless of your gender, remember these simple rules:

  • The more you trade, or buy funds that trade high volumes of stock frequently, the lower your return is likely to be.
  • Buying an investment you feel will be hot is likely to be harmful to your wealth.
  • The more complex your portfolio, the lower your returns are likely to be.

It's simple to buy that low-cost global portfolio rather than following our instincts. Yet simple isn't always easy, especially for us men and our testosterone.

Allan Roth is a financial planner based in Colorado Springs, Colo. He writes a weekly online personal finance column for AARP.org.

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