The Investment Gender Gap
By Matt Mikula, CFP®, Balasa Dinverno Foltz LLC
Are women better investors than men?
There have been several studies over the past decade that would certainly suggest so. A popular study in behavioral finance completed by finance professors Brad Barber and Terrance Odean in 2001 found that men are worse at investing because they tend to be more overconfident in their decision making. The study showed that men traded 45% more frequently than women which resulted in lower returns (men trailed women on an annual basis by 1.4%). In addition, single men traded 67% more than single women, earning 2.3% less on an annual basis. Their last finding makes sense to me personally: having a family myself with two young daughters has certainly helped me make better life decisions knowing that we are all counting on each other and I am not the only one who will be dealing with the consequences!
Another study in 2004 by Digital Look, a financial media company based in the U.K., reached the same conclusions but for different reasons. Their results point to a healthier trend for women. The Digital Look survey concluded that women are doing a better job putting together a balanced portfolio, whereas men tend to take more risks and jump on the next hot investment idea. This balanced approach proved more effective in the end for women investors.
I am sure these findings are not a surprise to some—successful investing is as much about preventing mistakes and long term discipline as it is about asset allocation and managing risk. But where can women improve their lead on men and build on their strengths as concluded in the research described above? Below are some points worth considering.
1. Understand your asset mix. Many investors have no idea the amount of stocks versus bonds they hold in their portfolio. Bonds provide the stability needed in a portfolio while a diversified stock mix rewards investors with long term growth. I recently met with a married couple nearing retirement (the husband and wife were both executives) and each described themselves as conservative investors. Yet when I reviewed their portfolio, they held 85% of their investments in stocks! The couple did know how they got to this allocation—more than likely their investment strategy was buying investment ideas without understanding how the particular investment fit in with the rest of their portfolio. While women may do a better job putting together a balanced portfolio, it is essential for women to also have a better understanding as to how they got to this mix and how it relates to their ultimate goals.
An investor’s asset mix should be based on their personal goals: What rate of return do you need to earn in order to maintain a comfortable lifestyle during your retirement? How much risk are you comfortable taking to reach your goals without losing sleep at night? Women need to find a balance here, prioritize, and may even need to make sacrifices to find a comfortable median.
2. Diversification lowers volatility. A few years ago I met with a recently widowed retiree who was looking for some investment direction. She felt very comfortable with her investment portfolio because it held “blue chip” large U.S. stocks which paid high dividends. While the perception is often that these companies are stable, she was taking on a large amount of risk by having such a high concentration in these types of stocks alone. In fact she was jeopardizing her income needs even though the stocks paid decent dividends because she was depending on the future growth of only a few companies.
It is essential that an investor build a diversified portfolio and own a good balance of the different asset classes, which includes large cap stocks, small cap stocks, growth stocks, value stocks, foreign developed stocks, emerging market stocks and real estate investments.
3. Keep costs minimal. There are two costs that women can control when it comes to investing: investment expenses and taxes. Mutual funds have costs embedded in them that many investors may not realize. The expense ratio is the percentage that the fund takes from the portfolio for the expense of running the fund. Morningstar Inc., a mutual fund research company based in Chicago, has reported that the average expense ratio for an active stock mutual fund is about 1.4%—which means if a portfolio earns 10% in a given year, the investor will receive a net return of 8.6%. If however, an investor uses a passive index fund, the typical expense ratio ranges anywhere from 0.1% to 0.3%—a much better deal for the individual investor.
Taxes are another expense worth paying close attention to as minimizing this cost can also provide additional return to your portfolio. Ignoring the tax consequences of your investing decisions can be detrimental to your goals because more of your earnings would be going to Uncle Sam instead of to your pocket. Use investment vehicles that are tax efficient and balance your investments between taxable accounts and tax deferred accounts in a way that will minimize your tax bill each year.
4. Go automatic. One of the great contributions to the investment community is the 401k plan. Although there is still room for improvement, I believe the best attribute of 401k’s are the automatic deduction from your paycheck each month going into your account. This automation is “forced savings” where investors can prevent themselves from spending their entire paycheck each month. You know the saying, “you can’t spend it if it’s not there!” As a result, people will adjust their spending accordingly. In addition to a 401k, women can also set up an automatic monthly investment plan for their personal account which helps them stay disciplined in their savings and focused on their longer term goals.
5. Monitor and rebalance. While automation helps investors save for the future, it is still crucial that women pay attention to their holdings and rebalance when necessary. Are your investments tracking well against their indices and peer groups? Investors may be happy with a 10% return on their portfolio—however if the market went up that same year by 25%, it certainly doesn’t feel as good anymore. Are your holdings over-weighted or underweighted based on market conditions which would require you to rebalance? It is important to periodically review your holdings to make sure they are keeping you on track.
A study by Merrill Lynch in 2005 found that 47% of women in their survey did not feel they were knowledgeable enough about investing (versus only 30% of men). The cynic in me wonders if this is another reflection of the overconfidence in men! In all seriousness, women feel more comfortable with their financial lives when they understand their investments, and are better prepared for the future so they can focus more of their time on enjoying life and the joys (and sometimes the challenges) it brings.
Matthew S. Mikula, CFP®, is a Wealth Manager with Balasa Dinverno Foltz LLC. His primary role involves managing client relationships and providing direct counsel on financial planning issues. Matt is a member of the Wealth Management Committee and the Women’s Service Team. He has been quoted in various publications including National Underwriter Life & Health and Financial Planning magazines.