The investment world has a reputation for being male-dominated, but recent evidence shows that women may be better investors than men1.
Wherever you turn in the financial world, there are few women to be seen. Women make up 14% of angel investors (rising to 22% in the US), 19% of senior roles at large institutional investors and just 7% of senior positions at asset management companies2. Films such as “The Wolf of Wall Street” reinforce the masculinity of investing that most of us perceive.
Despite this, the women who have made it to the powerful positions in investing provide evidence that women’s behavioural psychology may help them make smart investment decisions. One seven-year study by the University of California found that single female investors outperformed single male investors by 2.3%3.
The study found that the reason behind this was that men tend to trade more. The more you trade, typically, the more you lose — as well as racking up all those trading costs.
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Many of us are cautious about ascribing generic ‘male’ or ‘female’ behaviours, but there is evidence that basic differences in our biology may affect our cognitive and behavioural psychology. Fundamental differences do broadly exist between the genders as well as within, and regardless of, gender groups.
Various studies over the past ten years have showed that men and women define success in different ways4 and react differently to wins and losses in the stock market5.
It’s a great buzz word in an interview, and most of us like to claim that’s what motivates us – but it’s the actual nature of goals that appears to determine success in investing. While men seem to focus more on short-term aims of ‘beating the market’, women define success as working towards a long-term goal.
This lends itself well to investment projects such as pensions, whether you’re a professional investor or saving privately for your own retirement. Similarly, women appear to be more comfortable with abstract aims and delayed gratification than men, who tend to seize on small benchmarks to quantify progress6.
Beware of overconfidence
Any seasoned investor knows that over-reacting to short-term market fluctuations can result in losses for your returns; taking the long view is generally accepted as the best approach.
With their long-term focus, many women seem to be able to meet with stock market triumph and disaster without either being overconfident or losing heart. Men, on the other hand, can be more susceptible to the ‘winner’s effect’; taking a disproportionate amount of confidence in their decisions. Prolonged overconfidence ultimately leads to economic ‘bubbles’; rapid expansions followed by a drastic drop that are catastrophic for investors and can ricochet through the markets.
Diversity is key
Of course, replace every male investor with a woman and you would see an equal but opposite phenomenon. Countless studies have reached the conclusion that diversity is a crucial indicator of success . A mix of approaches, perspectives and cognitive behaviours is likely to be the recipe for making smart, balanced decisions and seeing great returns.
This is gender equality, not just for its own sake but because it makes economic sense, which is something that the financial world will soon wake up to.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. ISA rules apply. Pension rules apply. Tax treatment depends on your individual circumstances and may be subject to change in the future.
1. Nation of angels: the unsung heroes of Britain’s economy January 2015
2. Nation of angels: the unsung heroes of Britain’s economy January 2015
3 Washing Post 11 October 2013
4 Association for Psychological science
5 Journal of Entrepreneurship & Organization Management
6 The wall Street Journal
7 The wall Street Journal