To help us understand why this is even a question, let us delve into a little male/female psychology to uncover some key differences between women and men before we analyze why women have proven to be better investors than men.
According to the references listed at the end of this article, women tend to have a greater desire for self-control, while men tend to be overconfident and therefore take more risks.
These papers and articles describe that a higher percentage of women (10% higher) than men get stressed easily, but a higher percentage of women (6% higher) also want to exert greater financial discipline and self-control. My interpretation is higher stress drives a higher need for higher self-discipline and control to reduce stress.
Women are also less willing to choose high risk investments because they are not financial risk takers. Again, I’m assuming this is because they get stressed more easily and taking less risk reduces stress.
Now that we understand the natural tendencies of women to be more cautious, careful, and in control, let’s explore how their decisions can translate to better investment results over the long-term.
There are two asset classes we care about here:
1. Risk consisting of higher volatility and higher maximum loss investments like equities, commodities, currencies, cryptocurrencies, and real estate; and
2. Safety consisting of U.S. Government Treasuries and Cash
If we look at a man who’s willing to take large risks to get large returns (as Jim Cramer has suggested many times on his show as a best practice), his all-in equity portfolio invested in the S&P 500 would have returned about 7.65% annually on average over the 15-year period from March of 2005 to March of 2020.
Over that same timeframe, the maximum loss in his portfolio would have been 55.19% from the market peak of October 2007 to the market bottom in early March 2009.
A more risk averse woman who placed 50% of her assets in Safety (unlike her male counterpart) and 50% of her assets in Risk in the S&P 500 saw an average annual return of 8.52% with a maximum loss of 22.67% over the same 15-year period. These results are in line with articles published in the Wall Street Journal and other sources citing that women’s returns are typically 1% better than those of their male counterparts.
What these sources don’t discuss or examine is how the maximum losses incurred by investors can affect their investment decisions and hurt them even further. The point being if women are experiencing much milder maximum losses, they tend to stay with their investments longer instead of selling at or near the bottom and locking in their losses like their male counterparts.
As the table below showing the returns of average equity investors relative to the S&P 500 demonstrates, the average equity investor has constantly underperformed the S&P 500.
Notice how the average equity investor underperformed the S&P 500 by as much as 7% or 8% depending on the timeframe.
When investors become scared during a large maximum loss in the markets, they often sell their investments to protect themselves, at or near the bottom. Then of course they are too afraid to buy back into the market until well after it has substantially recovered from the loss. The results are obvious in the above table.
Looking at it another way, the graph below shows the 15-year results from March 2005 to March 2020 for two portfolios. The first portfolio has 50% of its assets invested in U.S. Government Treasury Bonds and 50% of its assets invested in the S&P500 and from my experience as a money manager, women find this type of “safer” allocation more appealing. As you can see it has an average annual return of 8.52% with a maximum loss of 22.97%.
The second portfolio has 100% of its assets invested aggressively in the S&P500 and I spend a fair amount of time convincing some of my male clients not to invest this way. The return is almost 1% lower at 7.65% and the maximum loss is much worse (more than double the first portfolio) at 55.19%.
How to beat an all-in risky strategy with less than half the risk.
Risk is Risk, but all Bonds are not created equal
Not all bonds are safe. Corporate bonds carry corporate risk and therefore, the risk of default and bankruptcy, and people tend to forget that fact.
Corporate bonds as a group can lose 12% to 34% of their value depending on the overall risk rating of the group. High rated bonds have in the past lost 12.23% of their value during times like the 2007-09 financial crisis. High Yield bonds (junk bonds) lost up to 34% of their value during the same period.
U.S. Government Treasuries are recognized throughout the world as the safest investment, but there is another benefit most people do not understand.
When a healthy portion of Treasuries are mixed together with equity risk assets, they combine in a non-linear way where the resultant portfolio performs better than either of the constituent parts. It’s kind of like 1+1=3.
This is why in the bar chart above, the 50/50 portfolio created with Treasuries and S&P 500 performs better than the S&P 500 alone – both in terms of return and in terms of maximum loss.
To all the women investors out there: Follow your gut when it comes to caution and safety in your investment portfolio. You will continue to benefit over the long-term.
To all the men investors out there: Pay attention to your mothers and wives. There is much you can learn from them.
Barclays Wealth in co-operation with Ledbury Research, October 2009. Understanding the Female Economy: The Role of Gender in Financial Decision Making and Succession Planning for the Next Generation. Women Want More (In Financial Services, “BBC Opportunities for Action. https://www.findevgateway.org/sites/default/files/publications/files/barclays.pdf
David Weidner. June 2011. Why Women Are Better Investors Than Men. The Wall Street Journal, https://www.wsj.com/articles/SB70001424052702303714704576385581336206062
Ron Lieber. October 29, 2021. Women May Be Better Investors Than Men. Let Me Mansplain Why. The New York Times, https://www.nytimes.com/2021/10/29/your-money/women-investing-stocks.html
Calvin Rose. October 25, 2021 written, but not yet published. What Is Wrong With My Portfolio?, a case study. https://drive.google.com/file/d/1sAzbkeAm-dS3EderQBJvkMLlFY9SWKHc/view?usp=sharing
Calvin Rose. July 22, 2021. What do Baseball and Investing Have in Common? https://conta.cc/3kKRAgY
Calvin Rose. June 10, 2021. Outperformance – Underperformance. https://conta.cc/3zm8ur1
Kerry Hannon. October 4, 2021. Women are less likely to ‘freak out’ over their investments than men. MarketWatch, https://www.marketwatch.com/story/female-investors-are-less-likely-to-freak-out-11633311590
Georgette Jasen. May 3, 2015. Male Investors vs. Female Investors. The Wall Street Journal, https://www.wsj.com/articles/male-investors-vs-female-investors-how-do-they-compare-1430709406
Jason Zweig. May 9, 2009. For Mother’s Day, Give Her Reins to the Portfolio. The Wall Street Journal, https://www.wsj.com/articles/SB124181915279001967
Matthew Frankel, CFP, November 1, 2015, updated October 2, 2018. The Average American’s Investment Returns – and How You Can Do Better. Dalbar’s 2015 Quantitative Analysis published by the Motley Fool, https://www.fool.com/investing/general/2015/11/01/the-average-americans-investment-returns-and-how-y.aspx
This information is provided by Clear Capital Management LP (“Clear Capital” or the Firm”), a Registered Investment Advisor Firm with a principal office in the Commonwealth of Pennsylvania, for informational purposes only. No portion of the commentary included herein is to be construed as a solicitation to affect a transaction in securities or the provision of personalized investment or tax advice. The Firm’s market discussion and investment models are based on the Firm’s proprietary research and back-tested market data. This back-tested data has been prepared with the benefit of hindsight, and the market trends and economic conditions on which these statistics are based may not endure in the future. Past performance is no guarantee of future results, as there can be no assurance that any particular strategy or investment will prove profitable in the future. Composite account performance reflects the reinvestment of dividends and other related distributions, as well as the deduction of the Firm’s wealth management fee. Any reference to a market index or benchmark such as the S&P 500 or the Aggregate Bond Index is included for comparative purposes only, as an index is not a security in which investment can be made. Indices are unmanaged benchmarks that serve as broad market or sector indicators and do not account for management fees or transaction costs generally associated with investable products. Clear Capital may discuss and display, charts, graphs, formulas and specific stocks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. This information offers limited information and should not be used on its own to make investment decisions. Investing involves risk, including the potential loss of principal, and investors should be guided accordingly.
