Forbes: What Women Can Teach Us About Money

 

Just because women drop hundreds of dollars at a sale at Bloomingdales doesn’t mean they don’t know how to invest. I mean those $400 Jimmy Choo’s were a good investment right? When it comes to investing, research shows that while men tend to overestimate their financial competence, women seek information. According to David Tyrie’s article in Forbes, women’s financial behavior holds crucial lessons for all investors, regardless of gender.

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What Women Can Teach Us About Money

David Tyrie David Tyrie, Merrill Lynch

From how they seek information to how they set goals and manage expectations, women may help identify important dos and don’ts for any investor.

Women today are economic powerhouses. They now own 40% of America’s privately owned businesses and hold half its wealth — estimated to be $11 trillion of a total $22 trillion by 2020. Two in 10 married women outearn their husbands, and over the course of a family’s life, 90% of women will control its wealth.

It’s no surprise then that women’s behavior as earners, investors and savers is the subject of a large and growing body of behavioral economic research, which has yielded important findings. For example, when women do invest, they tend to look for informed advice and thus may have a better rate of return than men. But women can also be too conservative in their approach, especially given the fact that they tend to live longer than men. Ultimately, from the way they seek financial information and advice to their understanding of the long term, women’s financial behavior holds crucial lessons for all investors, regardless of gender.

Gathering information vs. flying solo

Research shows that while men tend to overestimate their financial competence, women seek information: They get help, and compile data upon which to base informed decisions. In a large 2011 study, Spectrem Group, a private research firm, found that 46% of affluent and 82% of very high-net-worth women rely on financial advisors. Furthermore, they demand clear, in-depth facts from those advisors before acting.

The result of getting informed investment advice? Annual returns that are two percentage points higher a year versus those of people who didn’t seek experts’ input, according to one study.

Men, by contrast, “are substantially more overconfident about their relative performance,” notes an often quoted study on gender and behavior in the Quarterly Journal of Economics. Yet another study notes that instead of backing off, they’re “more likely to see a risky situation as a challenge.”

Slow and steady vs. frantic and impatient

Women also tend to limit their trading far more than men do. They prioritize protecting principal rather than taking risks to grow their assets (6 in 10 wealthy women surveyed by Spectrem made that choice). A study by the University of Michigan’s Retirement Research Center found that men frequently and unnecessarily trade their holdings (what it called “disproportionate portfolio churning”). All other things being equal, the male participants traded 56% more than their female counterparts, and the more they traded, the worse their performance became — “a result of a too-rosy estimation of their own investment skills,” the researchers wrote. One reason for the inferior returns was the triggering of fees.

A landmark study on gender differences in stock investing also found that men tended to sell too early, or to swap assets for new ones that underperformed what they had sold. The women, by contrast, were more inclined to take the long view, understanding that performance in many cases is best measured over time.

By the same token, different financial periods can call for different approaches. For example, the current low-growth environment in the U.S. may require a more active mentality when it comes to investing. Luckily, this is where women’s aforementioned penchant for seeking informed advice before making financial decisions can help them.

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