Invest More Like a Woman

If you were offered a way to increase your returns while lowering your risk, you would think it was some sort of cheap ploy. There are very few free lunches in the markets, but there is a very simple way to generate better risk-adjusted returns. Invest more like a woman. For the 51% percent of you who are women, this should be pretty easy. For the other 49% who professionally manage the vast majority of funds, it might be a more daunting task.

You wouldn't think this gender balance was the case when you look at the financial services industry in general and the money management business in particular. But even a cursory glance at the boardrooms or trading floors would show a lack of women. The numbers bear this out as well. Recent surveys show that women manage only 10% of mutual funds and only 3% of hedge funds.

 Some argue that the evidence points toward a prejudice against females in finance.

 No matter how you parse the data, this seems like a market failure.

This disparity is all the more confounding when research shows that women generate returns that are equal to if not greater than what men achieve. One study showed male fund managers trading more aggressively and not sticking to their investment mandate. However, this activity didn't translate into higher risk-adjusted returns for male managers.

 According to these results, a female-managed fund is more likely to play nicely with other funds in a portfolio.

The danger of overconfidence and its impact on investing is a recurring theme throughout this book. Overconfidence manifests itself in overaggressive trading. A now classic study by Barber and Odean documented that men trade more than women, thereby reducing their returns.

 This effect is even more pronounced among single men. Therefore, if men took a less frenetic approach toward investing, they could likely generate higher returns.

Taking a more measured approach may be more important in difficult markets. An index of hedge funds of which half were female-run outperformed dramatically a broader index of hedge funds in the turbulent market year of 2008.

 This performance led in part to this conclusion: “The tendency of many women investment managers to be more patient and consistent, as well as their tendency to examine more conflicting data when making investment decisions, adds a moderating effect to highly turbulent markets and may be especially significant during market downturns.”

Maybe we shouldn't be so hard on men. It may simply be the case that their biology is working against them in some very fundamental ways. Research has shown a link between testosterone levels and risk taking. From a trading perspective, one could see how a little testosterone could help a trader. However, an overabundance of testosterone, which shows up after a series of winning trades, could lead to overly risky trades.

 Another hormone-related effect is evident as well. Cortisol levels, which are associated with stress, show up during periods of market volatility. Over long periods of time, it seems that elevated cortisol levels can have real, negative effects on health and mood.

If you extrapolate this behavior to the markets as a whole, you could see how it could generate bull and bear markets. Researcher John Coates stated: “Maybe bubbles and crashes are coming from these steroids … maybe if more women and older men were trading, the markets would be more stable.”

We certainly can't legislate who trades in the markets or whom people hire to manage their money. The issue of gender equity in the financial services industry is beyond the scope of this discussion. However, we can highlight the ways in which female investors excel so that you can try to apply those ideas to your investment approach.

One author argues that female investors have a great deal in common with the way that Warren Buffett invests. LouAnn Lofton notes eight ways that the typical approach of female investors jibes with Warren Buffett's. She notes that female investors are more realistic in their investment expectations than men. Lofton also notes that women “put in more time and effort researching possible investments, considering every angle and detail, as well as considering alternate points of view.”

It is easy to get locked in to thinking about investments in a certain way. The important takeaway is that all investors, male and female, need to challenge themselves. Just as men are more prone to overconfidence, women are more likely to “consider every angle” in regard to an investment, which could very well lead to analysis paralysis. We are all flawed and filled with a range of biases. The challenge for men and women is to acknowledge these biases and try our best to combat them.

That being said, men probably have the most to gain from this sort of exercise. Jason Zweig's advice to men probably sums things up best: “Memo to men: Your household's investment portfolio will be less risky and more diversified if your wife helps manage it. She will share in what comes out of that portfolio down the road; shouldn't she share in what goes in to it? Chances are, her ideas and emotions will complement yours, and you will both end up wealthier. At least one of you will end up wiser.”

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