- Men, Women Invest Differently. Here’s How They Can Benefit From Working Together
- Friday Notes: The odds of beating the market, weighing risk vs return, and your broker’s fiduciary duty
- Could Overconfidence Harm Your Investment Returns?
- Friday Notes: Why we invest in low-cost passive index funds
- Investing Habits of the Wealthiest 1%
- When It Comes to Stocks, Buying Local has Risks
- 3 Key Steps to Surviving a Volatile Market
- How to Protect Yourself Against Investment Fraud
- Kicking off 2015 with a New Look and Mobile Features
- For a Successful 2015, Resolve to Avoid These Investing Mistakes
Men are from Mars, women are from Venus. The book title-turned cliché phrase happens to be as true of relationships as it is of investing. Men and women behave very differently as investors, be it when it comes to which stocks they pick or the type of brokerage firms they trust to manage their money.
“Men are looking to hit their investment selections over the fence,” says Stan Corey, managing director at United Capital. “Women are willing to hit singles and doubles.”
Women tend to be more conservative in the investments they choose. That’s particularly true of women who have recently become single, whether through a divorce or because they are widowed, says Kimberly Foss, president and founder of Empyrion Wealth Management. Even married women are making safer bets with their investment dollars than their male counterparts.
“In many cases, [making safer bets] is the right choice,” she says. “Women are still three times more likely than men to leave the workforce to care for children. And being away from the workforce means no 401(k) account and no company matches or pensions. Therefore, with less dollars to invest, it’s natural to be inclined to protect those dollars.”
How women choose their financial advisor or brokerage firm also differs from men. According to research from San Francisco-based investment firm SigFig, men tend to be more likely to choose a brokerage or investment firm that ends in “trade” (E*Trade or Scottrade), while women gravitate towards firms like Schwab and Vanguard.
Audra Lalley, a financial advisor at Miracle Mile Advisors, says female investors want to feel a level of trust with their advisor upfront, while men are more likely to jump right into the investing process and decide as they go along how much clout their investment professional will carry.
And when it comes to the investment vehicles they pick, women are much more inclined to stick to investment vehicles they know and stay away from things they can’t understand, be they structured notes or collateralized mortgage obligations, says Lalley. “Men tend to gravitate toward riskier products, whether or not they can reverse-engineer them themselves,” she says.
Women also tend to be long-term investors, which means they pick a stock or investment idea and stay with it over the long haul. That could be one of the reasons their portfolios did 12% better than men’s portfolios in 2014. Thanks to this buy-and-hold attitude, women may be less likely to panic over daily market gyrations and end up selling low and buying high.
One area where women trail men, however, is confidence. Part of it is because women know they will likely live longer than their male counterparts, says Foss. Another part is an unrealistic fear of losing everything.
“Women now make up more than half of the professional and technical workforce in the U.S. They are earning postsecondary degrees at a faster rate than men and the wage gap, particularly for younger women, is closing,” says Foss. “And yet, the lack of confidence persists.”
This may be why landing a male investor as a client or getting him to invest in a new idea is much easier than a female investor, says Chris Markowski, president of Markowski Investments. With men, you can paint a picture of fancy cars, big houses and endless gadgets, whereas women aren’t as easily impressed, Markowski says. “You can push a man’s greed button much more.”
Men and women may have different investing styles, but — or because of that precisely — they have a lot to learn from each other. Women tend to be more conservative and men tend to be more aggressive. For couples, then, working together to find a happy medium can result in a sound, long term investing plan that will benefit both sides.
“It’s really smart to have both parties involved in the decision making,” says United Capital’s Corey. “If they are both part of the process, they will make better financial decisions.”
Friday Notes: The odds of beating the market, weighing risk vs return, and your broker’s fiduciary duty
1. The New York Times highlights an ongoing problem in the investment industry: it’s too hard for consumers to tell when financial advisers are adhering to their fiduciary duty and when they are not. (SigFig, as a Registered Investment Adviser*, has a fiduciary duty to our clients and is required by law to put our client’s best interests ahead of our own.)
If you are in the market for financial advice, good luck figuring out which financial advisers are legally obligated to act in your best interest. There is a big difference between glorified salesman and true investment advisers, and yet the onus is on consumers to sort it all out.
A long-awaited rule being drafted at the Labor Department, which oversees retirement plans, would try to fix part of this — at least as far as your retirement money goes. The rule, which was supposed to be released last month after the department missed another deadline in August, would require more investment professionals to put their customers’ interests ahead of their own; the legal term for that is fiduciary duty.
*Registration with the SEC does not imply a certain level of skill or training.
2. The Economist reviews evidence that suggests funds advertise more heavily following times of high performance.
3. The Economist has another spotlight on mutual funds. Large cap mutual funds have a 1-in-4 odds of beating the market in the last 20 years.
GMO has an interesting paper “Is skill dead?” on its website which explains the poor performance of active managers in the largecap sector. It says three factors are at work. Managers do not keep 100% of their portfolio in largecap stocks; they tend to have holdings of cash, foreign stocks and smallcaps. To the extent that these assets underperform the largecap index, the managers will underperform (and outperform when things go well). Last year, for example, the S&P 500 did much better than cash, international stocks or smallcaps, so it is hardly surprising that nearly six out of seven managers underperformed.
Well, it is an excuse, but is it a good one? Surely investors buy a US largecap fund to get exposure to largecaps, not the other stuff. To the extent that managers go off piste, that can only be justified if they reliably outperform. They clearly don’t.
This explanation only makes the lesson clearer; if you want an exposure to US large caps, buy a US largecap index fund with low fees.
Of course, many people will ignore this advice. They see an index fund as a boring commodity product; they want the best in class, a manager that can outperform. And no active manager will admit that he (or she) is likely to underperform. But it is remarkable how few will put their money where their mouth is.
4. We shared a few thoughts on how to weigh risk vs return in your portfolio.
Nobody sets out to lose money in the stock market. Yet, one third of investors finished 2014 with 0 percent or negative returns, according to data from San Francisco investment management company SigFig.
In hindsight, the people who lost money likely picked the wrong investments. The problem is, you can’t know with certainty if an investment will be successful. This is why you diversify. Yet, many investors’ portfolios are too aggressive for their age, investing horizon and risk tolerance.
Sometimes it seems like individual investors just can’t take a hint. In 2014, 84% of investors who sync their portfolios with SigFig underperformed the S&P 500. Of course, a diversified portfolio of stocks and bonds should underperform the market when it rises, and outperform the market when it falls. Yet, when we asked investors how they expect to do this year, 91% said they expected to do at least as well as the market in 2015.
Their real problem isn’t underperformance — it’s overconfidence.
Self-serving biases like optimism and overconfidence can be helpful in life, says Terrance Odean, a professor of finance at Berkeley’s Haas School of business. But when it comes to investing, overconfidence can be dangerous. “A question many investors fail to ask themselves when they place a trade is who’s on the other side of this trade, and why do they want to trade with me at this price?” Odean says. “Chances are, the person on the other side of this trade is a professional investor who is making a living investing and who has access to all kinds of information you don’t have. This person is probably working with a team and probably has professional training.”
That information disadvantage goes a long way towards explaining why in Odean’s research, “on average, when individual investors sell a stock and buy another one, the stock that they sell goes on to do better,” he says. And the more often investors trade, the worse their overall returns will be, because they both make more bad decisions and incur more trading fees.
The Gender Divide
This confidence trap is a particular problem for men, who tend to be more overconfident and trade more often than women. SigFig data shows that men are 25% more likely to lose money in the market than women — and yet they’re still 1.5 times as likely as women to say that they expect to beat the market in 2015.
Research by Francesco D’Acunto, a PhD candidate at the Haas School of Business, suggests that this overconfident behavior is driven by stereotypes about men and women, and not by innate biological differences between the sexes. D’Acunto tested men and women on their risk tolerance both before and after they were asked to think about a situation when they were in control, or about stereotypically masculine or feminine traits. When they were “primed” in this way with ideas about power or gender stereotypes, men displayed greater risk tolerance than they had before, D’Acunto says. Women’s behavior didn’t change. “Men invest more often, and more money, when they’re primed with these stereotypes than without them,” he says.
Older men were more susceptible to these manipulations than younger men. This supports the notion that risky behavior is driven by ideas about masculinity and not by biology, D’Acunto notes, because “biology and genetics are more or less the same for hundreds of years,” while stereotypes change as society changes.
A more progressive, egalitarian society might arguably make men better investors. In the meantime, what can men (and women) do to overcome the overconfidence trap?
It’s important to keep in mind that investing requires accepting some level of risk. To the extent that men tend to be more willing to take on that risk than women, these stereotype effects could end up benefitting men, if they make men more willing to invest in the first place, D’Acunto says.
The real problem with overconfidence is that it leads us to believe that we’re much better at picking stocks or actively managed mutual funds than any of us really are, says Odean. If you enjoy trading, that’s fine, Odean says, but you should “treat it as an expense and a pastime. Don’t trade with your retirement money.” With your retirement money, you shouldn’t even try to beat the pros, he says. Minimize your transaction costs, select a risk-appropriate diversified allocation, and rebalance regularly.
Aleks runs content at SigFig. Before joining the company, she ran the editorial teams at Visually and Mint.com. Her work has appeared on SmartMoney.com and the Wall Street Journal, among others. At lunchtime and on weekends, you’ll find her swimming, biking or running — or all three, in that order.
Data Science and AnalyticsBenny does all things data and science at SigFig. He was Director of Product Analytics at TinyCo and a Principal at Applied Predictive Technologies, where he helped companies run smarter experiments. He studied Economics at Harvard, is an avid cook, and loves running.