Wall Street is often portrayed as dominated by fast-paced trading and massive risk-taking. But it turns out that qualities like patience, humility and risk aversion can drive better returns over time. It may prove lucrative to remember that women tend to naturally exhibit these qualities.
Over the last few decades, women have made great gains in education and business. In fact, the National Center for Education Statistics shows women now earn 60% of all undergraduate and graduate degrees, and 46% of all MBAs.
When it comes to investing, however, women remain vastly underrepresented. According to a 2015 study by Morningstar, women manage only 8.69% of open-ended stock funds.
On the other hand, female investors tend to consistently outperform. According to the University of California, Berkeley, study, “Boys will be boys: gender, overconfidence and common stock investment” by Brad M. Barber and Terrance Odean published in 2001 — the first of its kind to look at gender and investing — women outperformed their male counterparts by 2.3% over a seven-year period.
One of the most common and corrosive mistakes investors make is trading too much. In fact, a second study from Berkeley shows that the more an investor traded, the lower his or her returns. Despite this evidence, investors are buying and selling stocks at a more rapid pace than ever. In 2015, wealth management firm MFS found the average stock was owned for a mere eight months. This compares with an average of eight years in 1960. The Berkeley study found that women tend to trade a full 30% less than their male counterparts. The temptation is clear: information is instant, trading commissions are low and it can be exciting. But as Mr. Barber and Mr. Odean state: “Trading is hazardous to your wealth.”
Part of the reason there are fewer women on Wall Street may be because they don't feel prepared. A survey by BlackRock reported that only 25% of baby boomer women feel knowledgeable about investing, compared with 46% of boomer men. What may come as a surprise to most investors, though, is that having less confidence can actually be an asset.
Academics call it “overconfidence” — that dangerous idea that one knows something the market doesn't. Data from the online investment adviser SigFig demonstrated that the more overconfident investors are, the lower their returns tend to be. Most investors overestimate how much they know, but research shows women tend to be less overconfident than men, and older investors are less overconfident than younger investors. A humble investor is likely to do more homework: listen to earnings calls, visit the company, talk with the management team, study earnings models and pore over news reports.
Another key to building money over the long-term is not to lose it. Women, perhaps because of that lower general level of confidence, tend to be more risk-aware according to customer data from Betterment. As a result, Betterment's data found women invest in less-risky assets and make fewer changes to their strategy. Consequently, women's portfolios may lag in an up market, but they may lose much less in a down market.
There are many great portfolio managers out there — men and women. Perhaps as more women enter the field, we'll see more strategies embracing the traits that play to women's natural strengths, including patience, humility and risk aversion. And, hopefully, that will bring a greater selection of strategic options to investors and individuals who have wanted to invest but have been wary of the risk.
Kara Murphy is chief investment officer of SunAmerica Asset Management, the asset management division of AIG.