For Better Investing, Think Like a Woman
Warren Buffett said that an investor’s ability to remain calm and level-headed is the most important quality when it comes to long-term investing success. A number of studies have consistently reported that women generally possess this temperament, and their investment returns tend to outpace men’s.
This is good news for women who may not feel confident about investing. Today, more women are taking the lead with investing, with 76 percent now the main retirement planner for their households, according to a 2009 study by DailyWorth. However, only 47 percent of women are confident in their investing skills, compared with 61 percent of men, according to a 2012 RBC Direct Investing study. A lack of confidence can actually be a good thing, as men tend to be overconfident, overestimating their abilities to the detriment of their portfolio. Just as men stereotypically refuse to stop and ask for directions when lost, they also tend to want to navigate the investing world relying on their own sense of direction. But asking for help is the best way to improve your abilities. Also, a lack of confidence may lead to risk aversion, which can result in less frequent trading. This may be the key to female success. Men trade 45 percent more than women, yet their annual returns are about 1.4 percent less, according to a 2001 UC Davis study.
Playing the market, beating the competition, and winning are not motivators for the majority of female investors. Women tend to focus on specific goals, such as saving for a comfortable retirement. Many men report investing to out-earn other investors. This attitude can be effective in good times, but tends to promote unnecessary risk-taking. Biologically, women may be considered the more emotional gender, but their history of analyzing and managing a range of emotions has actually made them more stoic in the face of economic uncertainty. A 2009 study found that men were 10 percent more likely to sell at the bottom of the market than women, due to panic. Women also tend to take their time and gather necessary information before making decisions. When asked whether having ambiguous information would reduce their confidence and raise their perception of risk, 92 percent of women and 69 percent of men said yes, according to the RBC Direct Investing study.
Women tend to have the right personality to be good investors, but that doesn’t mean all women are naturally inclined to investing. It also doesn’t mean all men are impulsive risk takers. What we can learn from these studies is what personality traits the best investors have and how to embody those traits in our own investment approach.