Merrill was a guy, and so was Lynch. Goldman? A dude, and Sachs as well. Charles Schwab is a man, and so was E.F. Hutton.
Heroes or villains, winners or losers, our iconic investors are very, very male. But that's a mistake — because it turns out that women are often better at investing.
Fidelity offered up the latest evidence this month: Over a 10-year period, its female customers earned, on average, 0.4 percentage points more annually than their male counterparts. That may not seem like a lot, but over a few decades it can add up to tens of thousands of dollars or more.
"Invest like a woman is what you learn from this," said Lorna Kapusta, head of women investors and customer engagement at Fidelity.
This isn't the first time that researchers have found women to be the better investors. The surprising thing about this phenomenon, however, is that neither women nor men seem to be aware of it — and they end up depriving themselves of some lessons that might help both genders invest better.
Fidelity's analysis covered 5.2 million customer accounts (some people had more than one), from 2011 to 2020. It looked at individual retirement accounts, 529 plans and basic brokerage accounts that individuals (not financial advisers) controlled, but not workplace accounts like 401(k)s. No strategies were excluded: Those who traded individual stocks were tracked along with those who stuck to mutual funds.
The source of women's superior returns is the way they trade. Or, rather, how they don't. Female Fidelity customers bought and sold half as much as male customers. Vanguard saw similar patterns over the same decadelong period when examining workplace retirement accounts that it manages; at least 50% more men traded in them than women did every year during that time.
This is very bad. In a now-classic paper that appeared in the Journal of Finance in 2000, titled "Trading Is Hazardous to Your Wealth," two professors, Brad M. Barber and Terrance Odean, proved just that. From 1991 to 1996, individual investors who traded the most earned an annual return 6.5 percentage points worse than the overall performance of the stock market.
The following year, the two professors tackled trading and gender in a different paper called "Boys Will Be Boys." Sure, women traded more than they should, too, and from 1991 to 1997, their trading reduced their net returns by 1.72 percentage points per year. But the even more frequent buying and selling men engaged in caused them to take a 2.65 percentage point hit — more than twice the male underperformance that Fidelity found years later.
Why do men trade too much? Professors Barber and Odean chalked it up to overconfidence. And where does overconfidence come from? William J. Bernstein, a neurologist who turned his attention to investing years ago, points to testosterone.
The hormone causes three problems for investors: It decreases fear, increases greed and very much contributes to overconfidence. "It does wonderful things for muscle mass and reflex time but doesn't do much for judgment," he said.
Women, meanwhile, probably aren't as confident as they should be. Fidelity's evidence on this topic is downright depressing: In 2017, one of its surveys showed that just 9% of women thought that they would outperform men as investors. This year, only 14% of women said they knew a lot about saving and investing and 33% felt confident making investment decisions.
How did we get here? Some of the answers are obvious, for women who are married to men at least: For a long time, many husbands simply seized control of everything to do with investing, whether because the men felt entitled to have control as they were the sole or primary earners or because they had an undeserved conviction that they were better suited for the task. It's hard to gain confidence with no experience.
Is there a risk of defaulting to stereotypes here? Sure. These are averages we're talking about, and underconfident men and fearless women are all around us. Many young men hang on every word that Cathie Wood, Ark Invest's famous money manager, utters.
