January 7, 2013 – Published in the North Bay Business Journal
Everyone is looking for an edge when it comes to investing. Who knew gender could be a factor? Often it is the male who professes more interest in finance and investing, but it turns out the female brain’s innate affinity for “connecting and protecting” has some advantages.
Women are wired differently
Men and women perceive risk differently, according to Jennifer Lerner of Harvard University. Her studies on the effects of emotion on decision-making indicate that in a crisis men respond with anger while women respond with fear. View it as a control issue: anger makes things seem more certain and less risky. Fear, on the other hand, creates uncertainty and the feeling that everything is beyond our control.
So if women are more risk averse, why do women appear to have the edge in terms of investing? Behavioral Finance economists Barber and Odean found that men were 45 percent more likely than women to make trades, and yet the net result of their increased activity decreased their annual returns by nearly 1 percent annually. “We believe there is a simple and powerful explanation for high levels of trading on financial markets: overconfidence,” they concluded. It is precisely because women are not as confident, a recent Barclays Capital study suggested, that “women were more likely than men to have a greater desire for self-control.” This attribute translates into more caution, which equals less trading and more earnings.
Investing with a purpose
The simple truth, however, is that regardless of one’s gender, the women’s way of investing is available to anyone. For the long-term investor, it is not only prudent but lucrative to be cautious, to be unwilling to take unnecessary risk, and to avoid acting hastily in situations of stress and uncertainty.
Successful typical attributes of female investors
Here are some typical attributes of women investors that work well, regardless of gender:
Lower risk tolerance
Base your risk/return tradeoff on achieving your goals and finishing the race. Determine how much return you need to fund your retirement and how much risk you are comfortable taking. It isn’t about the highest return. The key is earning enough to meet your goals without unnecessary risk and worry. Home runs are better left to sports.
Trade less often
Lower costs matter. Despite the thrill of active trading, preserving your real return after fees and inflation is what allows your investments to grow. In addition to extra costs, excessive trading can also create unnecessary tax consequences.
“Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing,” opines Warren Buffett. There is also a great quote from an old-time baseball player on batting success: “Hit it where they ain’t.” The best mindset for successful investing is not herd mentality. If you can discipline yourself to buy low and sell high despite the lure of the masses and the media you will be a successful investor.
More patient, long-term focused
Consider having a long-term investing plan instead of making snap decisions based on current headlines. The trick to keeping a rational frame of mind when the markets are in turmoil is to invest with a long-term purpose in mind and to be aware of human nature. Whether it is anger or fear, emotions need to surrender to rational thinking in order to make investing a rewarding experience. Try to imagine the worst that can happen. When most people confront their emotions with reality a different part of the brain kicks in. And it is much easier to think twice about a potentially rash investment decision once the analytical mind begins to take charge.
Tend to be more diversified
Own a well-balanced mix of investments appropriate for your financial objectives and experience. Everyone knows this, so why is it a common investing mistake? The financial world has become a complicated place. There are over 7,000 mutual funds in the U.S. alone, not to mention individual stocks, bonds, ETFs and a number of other investment options. And as companies become more global it can become difficult for the average person to determine whether different investments are actually dissimilar or not. Another mistake we often see investors make is not understanding what investment costs are associated with the assets they own. Most self-investors would benefit from a professional second opinion if only to get clarification on diversification and fee structures.
More likely to seek professional advice
If you are wondering whether you need help, you probably do. A good fee-only financial adviser can help you clarify the “big” picture and stay with the game plan. Emotion-based human traits such as overconfidence lead to the belief that one can forecast the future even thought the rational mind knows it is unpredictable. This form of overconfidence, called market timing in financial jargon, is one of the main reasons studies show self-investors earning less year after year than they would simply investing in a market index.
So don’t let emotional impulses derail your plans. Invest more like a woman: diversify, shut out the short-term noise of the market, rely on low-cost funds, and follow a buy-low-sell- high strategy by systematically rebalancing your portfolio without emotion when stock or bond markets make significant moves.
Teresa Mitchell, CFP, is a certified financial planner and director of financial planning with Sebastopol-based Willow Creek Financial Services (<A href=”http://www.wcfsinc.com/” target=_blank>wcfsinc.com</A>, 707-829-1146), one of the leading wealth management firms in California. Wealth Matters is a monthly column from the firm’s partners.