The Trick? Refrain From Buying Stocks at Market Highs, Selling at Market Lows
About a year ago, around the peak of the pandemic-induced panic on Wall Street, I sat down with my wife to discuss what to do with the equity-market portion of her retirement account. At the time, stocks already were down 30% and with the U.S. economy in near-total lockdown, I feared that the worst of the sell-off was yet to come. She listened to my argument, logged on to her brokerage account and scanned the distressing numbers — index finger hovering over the “trade” button. Minutes passed. But rather than click on “sell,” she finally chose “quit.” No changes made.
One year later, with most stocks solidly back in record territory, it’s clear that my financial-amateur wife was right and her financial-professional husband was wrong. Research suggests there was always good reason to suspect that would be the case.
A study of 2,800 investors by the Warwick Business School found that investment portfolios controlled by women outperformed those controlled by men by 1.8% annually over a three-year period in the mid-2010s. The authors attribute the superior returns to women taking a longer-term perspective, picking less speculative stocks and trading less often (see Websites of Interest).
Professors Brad M. Barber of the University of California, Davis and Terrance Odean of UC-Berkeley reviewed the trading activity of 35,000 households over the six years through January 1997. Barber and Odean confirmed that women traded significantly less often than men and determined that they generated returns that beat their male counterparts by almost 1% per year. Notably, differentials in trading and returns were even more pronounced when comparing single men and single women. Though the Barber-Odean study is dated, human nature changes only slowly, if at all.
The Myth That Men Are Better Investors Is Just That — A Myth
An analysis of 8,000 investment accounts by Fidelity found that women were likely to save more than men, and that they outperformed male investors by 0.4% annually. “The myth that men are better investors is just that — a myth,” said Fidelity senior vice president Alexandra Taussig.
Yet the myth lives on; a different Fidelity survey revealed that only 9% of respondents considered women to be better investors than men.
Based on data from 55,000 professionals in 90 countries compiled by the management consulting firm Korn Ferry, women scored higher on nearly all so-called Emotional Intelligence Competencies. “The greatest difference between men and women,” the report stated, “can be seen in emotional self-awareness, where women are 86% more likely than men to be seen as using the competency consistently (18.4% of women demonstrate the competency consistently compared to just 9.9% of men).”
Understanding one’s emotions, of course, is key to avoid selling stocks near market bottoms and to keep from chasing overpriced shares during periods of market euphoria.
According to former International Monetary Fund managing director and current European Central Bank President Christine Lagarde, the global economy would be in better shape now if more women had been in positions of economic leadership in the early 2000s and thus were able to head off the subprime lending bubble. “As I have said many times, if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today,” Lagarde wrote in an IMF blog post.
This is not to suggest that all women are better investors than all men. Investment acumen is not gender dependent. Still, it can be instructive to think about why women — on average and overall — appear to generate better investment returns than men: Think long term, stick to your selection criteria, understand what you’re feeling, don’t overreact to bad news — and, like my wife, don’t be afraid to log off and wait out the storm.
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This article was originally published in the March 2021 issue of BetterInvesting Magazine.
Thomas D. Saler is an author and financial journalist in Madison, Wisconsin. His column ("Historical Perspectives") has appeared in the Milwaukee Journal Sentinel for 27 years and was named “Best Column” in the Milwaukee Press Club's 2016 Excellence in Wisconsin Journalism competition.
Websites of Interest
“Are women better investors than men?,” Warwick Business School; June 28, 2018
“Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” The Quarterly Journal of Economics; February 2001, Brad M. Barber and Terrance Odean
https://faculty.haas.berkeley.edu/odean/Papers current versions/BoysWillBeBoys.pdf
“Why women are better investors: study,” Reuters; June 7, 2017, Chris Taylor.
“New Research Shows Women Are Better At Using Soft Skills Crucial For Effective Leadership and Superior Business Performance, Finds Korn Ferry,” Korn Ferry; March 4, 2016
“Ten Years After Lehman — Lessons Learned and Challenges Ahead,” IMFBlog; Sept. 5, 2018, Christine Lagarde