Last Updated on November 14, 2020 by Oddmund Groette
Numerous studies suggest women are better investors than men, which of course might hurt the egos of many men. I find this fascinating, and it most likely confirms why it makes sense to make investing as simple as possible. Charlie Munger once said the best thing to do is to “sit on your ass” and let your capital compound without much stress and actions from your side. It seems this is exactly what women do!
This article is a summary of the findings of these studies:
- Who’s the Better Investor: Men or Women?
Before I start I would like to emphasize a couple of things: men save more and invest a bigger portion of their investments in stocks than women. However, those women that invest in stocks do seem to outperform men.
Women choose safe investments – avoiding risk and ruin
Men are more frequent investors in small caps. History shows small caps have performed well as a group, but averages never show the true performance of a group. You have to look at the performance of the median stock, and unfortunately, the median small-cap performs worse than the median large-cap. The average return of a group might be 7%, all the while the return of the median stock is negative. It’s simply more difficult to choose winners among small caps. Why is this so? Most small caps have not managed to get big for a reason: the sector consists of small and unproven business strategies and most of these ultimately fail. Large caps most likely have a bigger moat around their businesses for a lot of different reasons. They may be slow-growing, but they are more unlikely to go bankrupt.
The primary goal of any investment should be to avoid the risk of ruin. If a strategy has just a 0.01% risk of ruin, it’s not a bet worth taking.
Nassim Nicholas Taleb has a fantastic quote about averages:
Never cross a river that is on average four feet deep.
Men are more likely to buy stocks, women buy mutual funds
Hendrik Bessembinder made a famous study in 2017 which concluded that the median stock only “survives” seven years, and only 27.6% of the listed stocks manage to beat treasury bills. Thus, the median stocks have returned less than treasury bills even though the averages have performed much better. How are you going to pick those few good stocks? It’s extremely unlikely. Research shows small retail investors underperform both the market and mutual funds.
Most investors are better off investing in mutual funds, either active or passive (or both), and completely ignore picking stocks.
Women are not market timers
Women save, invest and forget about it. It can’t get any simpler than that! And the studies indicate this simple strategy pays off. Remember that only a 0.5% yearly return turns out to make huge differences over the long-term: over 30 years a 0.5% drag reduces the final result 13%!
Market timing is for most investors a futile exercise. At any time you will read about investors that predicted the right course of action, but there is a huge degree of survivorship bias. We only see those who succeed.
Take profits too early
Because many try to time the market, they end up selling too early. The market will always have long periods of flat returns, even negative, but eventually, it will rise again. The chart below is the S&P 500 since 1st of January 1929, right before the crash:
There are limitless opportunities to use hindsight bias to spot periods where it was unwise to be invested. Unfortunately, the cost of NOT being invested during a bull market is more costly than being invested during a bear market.
The biggest long-term risk is not being invested in productive assets. Drawdowns are an inevitable part of this. No pain, no gain.
Lack of plan and goals
I believe the best plan is as follows: Get an education or a job you like (if you don’t like your job – keep on looking/trying) and save x% of your income into real estate and/or mutual funds. Save regularly with automatic monthly withdrawals from your bank account and forget about it. Don’t check the news and don’t check the value of your assets as it most likely leads to unplanned action from your side. This is, I believe, why women perform better than men. They have a simple plan which they execute flawlessly.
While I was daytrading I followed this plan myself. I checked my mutual funds once a year when I filed my tax declaration.
Women make fewer transactions
Nordnet, Scandinavia’s biggest retail broker, writes that men on average make 12 transactions per year while women only do 4. Why? Because women most likely spend the least amount of time reading about the markets. What happens the more transactions you do?
- You risk chasing randomness and market cycles.
- If you sell to “lock in profits”, you miss buying back in when the market rises further.
- You waste your time trying to “time” the market.
Norway recently allowed a new form of investment account which defers taxes until you withdraw money from the account. Ironically, I believe this gives more incentives to sell and buy more with inevitable less returns.
Those women who save turn out to be better savers than men.
Women invest in the right product
Women invest more in mutual funds and less in specific stocks. They keep it simple. Why should any average investor invest in industry-specific funds, for example like healthcare? It does not make any sense. The simplest and best thing to do is to invest in a broad portfolio of stocks.
Women are less active on social media
I believe Twitter and social media are like poison. Many investors claim social media is good for generating ideas, perhaps rightly so, but at a cost of switching positions frequently. You need the discipline to filter out the noise. Generating a lot of good ideas have a huge downside, in my opinion. Furthermore, it takes a lot of time you can spend on other hobbies. There’s a reason why the economy has a division of labor: allocate your resources where they are best spent. Spend your time on your career to generate income, and invest in broad mutual funds.
The conclusion is simple: work, save, invest and forget about it. The simpler you make it, the better returns. Don’t try to outsmart the market.