“There’s no such thing as women’s feet.”
He was right, at least partially.
“He” was some outdoor industry guy talking about finding rock climbing shoes with the best fit.
Of course, women’s feet do exist. And there’s a body of research (study 1, study 2, study 3, study 4) showing that they have a tendency to be shorter, narrower and higher-arched than men’s feet.
But the guy’s point was that if you’re buying climbing shoes, individual foot differences should trump gender statistics.
How much does gender matter in investing? I’ve summarized the existing research – both the popular-in-the-mainstream stuff and some pieces from further afield – into five points.
How different are men and women as investors?
We don’t know as much as we think. Articles like the one you’re reading abound, but they tend to cite the same handful of studies, and there’s almost no research in the top journals – to the layperson, a study may be a study (and therefore fact), but within academic circles, much of the gender investing literature isn’t considered high-quality.
One complication for researchers is data availability: Until semi-recently, brokerages were reluctant to share account-level data, and the industry has not been in the habit of asking for gender.
Plus, times are changing, so studies done 20 or 25 years ago likely don’t reflect current reality.
Anyway, as with climbing shoes, some scholars have suggested that within-gender differences trump between-gender differences, which seems true. Let’s explore.
Women seem to invest better than men, at least on a risk-adjusted basis
The Wells Fargo
In 2021, Fidelity did a 10-year study across 5.2 million accounts – 5.2 million accounts is very robust data – and found that women outperformed men by 0.4 percentage points on an annualized basis. Fidelity doesn’t mention adjusting for risk, though.
Do women out-invest men because they pick better investments, or because they trade less?
In “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” a well-cited study, and one of the most respected pieces of gender investing research, from Brad Barber and Terrance Odean, Barber and Odean found that men trade 45% more than women do, and this overtrading costs men 2.65 percentage points per year of return, vs. a comparable ding of 1.72 percentage points per year for women.
As professional investors, do women outperform, too?
Good data for assessing professional manager performance can be hard to come by (mutual funds publicly report their numbers, but hedge fund and venture capital fund returns are often self-reported to industry databases, which can create survivorship bias). Vanguard found that women-led investing teams moderately outperformed male-led teams, but that mixed-gender teams (of key decision makers) performed best. Well Fargo found that female VCs outperformed male VCs.
Semi-similarly to Vanguard, InvestmentMetrics found that funds with women in leadership roles (including, though not limited to, exclusively women-led funds) perform comparably to male-led funds.
The data thus far suggests that women are better at playing the “consistent tennis” version of investing than men – steady performance focused on minimizing mistakes and overreactions. InvestmentMetrics also found that in 2022’s down market, women-led funds dropped only 2.6%, vs. 5.9% for make-led funds. Other studies (including Wells Fargo’s) have indicated that as individual investors, women trade less impulsively, hold fewer speculative stocks (and much less cryptocurrency), and are better at sticking to the plan than men are.
Interesting tangent: A study called “Do Investors Pay Less Attention to Women (Fund Managers)?” (Rau and Wang, 2022) began with data from a Chinese fund investing app that featured each fund manager’s photo prominently, meaning that the app’s investors had an especially clear and strong sense of fund manager gender. Rau and Wang found that although male and female fund managers performed comparably, investors rewarded male managers with more inflows following good performance, yet punished them with more outflows following down periods relative to female managers. Rau and Wang postulated that this may be due to an attention bias, and gave a nod to a 2014 study from India showing that boy babies received more breastfeeding, childcare, and vitamin supplements than girl babies did.
Women don’t invest enough
This is the real problem.
Despite placing better trades than men when they do invest, women, as a group, shy away from investing, and end up with less money come retirement. They’re more likely to be poor in their old age, when the fruits of the wealth compounding that investing provides would be most helpful – especially considering that American women live five to six years longer than American men do.
There are technically two choke points here:
- Having money to invest
- Taking action to invest.
On the former, American women only earn 84% of what men earn when they’re working, and reach their peak earnings 10 years before men do (partly a statistical effect of childbearing). These lower lifetime earnings may arise from deliberate lifestyle choice – taking time off to raise children or perform caregiving, which, while uncompensated, many people consider a noble contribution not only to family, but to society and humanity – as well as gender bias.
Fortunately, women are making rapid (at least in a generational sense) progress on earning more. And done inside a family structure, time off for kids and a comfortable retirement can still go together if a couple’s lifetime earnings are high enough. The unfortunate other side of this coin is that low-earning single mothers have a very difficult time amassing wealth for retirement.
But shifting from earning to investing, even when they have money, women don’t tend to put it to work through investments to the extent they should for building optimal retirement wealth.
A NerdWallet poll from 2021 showed that 48% of women invest in the stock market, compared to 66% of men. Correspondingly, 69% of women say they’ve “learned how to choose investments,” however that’s defined, relative to 83% of men.
Women are catching up quickly
If we’re talking strictly about women controlling more wealth, that’s about to happen quickly, if for an unfortunate reason: Male baby boomers are dying and leaving their wealth to their spouses; McKinsey estimated in 2020 that US women will control $30 trillion by the end of the decade, owing heavily to this. (McKinsey found that 70% of women change their financial advisor within a year of their partner’s death, incidentally.)
McKinsey also finds that relative to 2015, by 2020, 30% more married women were making investment decisions.
And that earlier Fidelity study notes that 67% of women are investing outside of a retirement account now (or at least were in 2021 – boom times tend to get people off the couch and into markets, whereas down years like 2022 tend to do the opposite). That number was just 44% in 2018. And 71% of millennial women were investing outside of a retirement account, vs. 62% of baby boomer women.
A 2016 Wells Fargo study found that single-woman and woman-led accounts were 37% of the survey group, whereas by 2021, they were 52%.
More women than men are graduating college now, too – American education’s new gender problem is that boys are getting left behind.
Women may not be as inherently risk-averse as we’re told
Research done in the US shows that women invest in a more risk-averse way than men do. Plenty of research shows this.
But are women inherently more risk averse as investors?
There exists a body of evidence showing that women are more risk-averse in various non-investing ways, like driving (Cordellieri, Baralla, Ferlazzo, Sgalla, Piccardi, Giannini, 2016), social situations (Frield, Pondorfer, Schmidt. 2020), and participation in generally risky activities, so there’s probably some “there” there.
But in the social sciences, if enough people believe an idea, it tends to become reality – plenty of well-meaning financial advisors assume that female clients should be steered down a less risky path; the “women’s climbing shoe” equivalent in the investing industry. And so at least in the US, women invest in a notably more risk-averse manner than do men.
But the extent of women’s risk aversion in investing has been questioned in the research in recent decades (Nelson, 2012 (working paper))(Schubert, Brown, Gysler, Brachinger, 1999).
And a study of Chinese investors (Fend and Seasholes, 2008) – China is a newer investing market, and Chinese investors have not evolved the same investing gender stereotypes that Western markets have – found no major differences between how men and women invest.
UK brokerage Capital.com found that 36% of women were willing to sell short, versus 29% of men (short selling is generally perceived to be a more advanced and risky investing practice).
Keep in mind that there’s an optimal amount of investing risk aversion: Too much and you won’t invest in anything; too little and you’ll blow yourself up. The irony is that while it’s beneficial for more women to invest in the first place, exhibiting a bit more risk aversion with regard to investment selection may actually be helping women’s performance, as excessive risk taking is a time-honored drag on investor returns.
Women have lower financial literacy
If women’s lack of participation in investing is the biggest problem, women’s lower financial literacy may be the biggest cause.
A study (Almenberg and Draber, 2015) of 1,300 Swedish investors found that when financial literacy is controlled for, women invest as eagerly as men do. This makes intuitive sense, as regardless of gender, financial literacy and participation in investing have been shown (van Rooij, Lusardi, Alessi, 2011) to go hand in hand.
Incidentally, I’d wager that the much-discussed lower confidence that women have in investing – Fidelity found that only 33% of women felt confident in making investment decisions, for example – is a red herring in a causal sense, in that it likely stems from lower financial literacy, and possibly even a more accurate grasp of the inherent low predictability of capital markets. (For evidence that most investors have too much confidence, see “The Courage of Misguided Convictions” (Barber and Odean, 1999).)
Further reading
If you’d like to read more and don’t mind technical references, I recommend a review paper called “Women and Finance” (Capelle-Blanchard and Reberioux, 2021). It leans heavily toward nurture as the main differentiator between men and women as investors – which feels like a point the climbing shoe guy would agree with if he were in this industry.
Neither James nor BBAE has a position in any company mentioned.
