With Mother’s Day this coming weekend, it seems fitting to highlight the significance of women. Women have unique strengths, and it just so happens that it shows in their investing. Over the last few years, several studies have found that women investors outperform men significantly. The first of these, by the University of California at Berkeley, found that women investors outperformed by a full percentage point over a six-year period.
What gives women investors their investing superpowers? It’s a combination of several factors, and the good news is that it isn’t limited to women with a high degree of investing skill or acumen. Instead, the difference comes down to things women are already adept at doing in their daily lives. So, let’s look at why women investors have an edge, and one thing that may hold them back.
Women Put Goals First
Women tend to focus on an end goal, whether it’s long-term or short-term. Having a goal in mind, like saving for retirement, kids college, or buying a house, means that women are motivated to stay invested until the goal is achieved, regardless of market movements.
Staying invested throughout market turmoil means that you may experience downturns, but you recover along with the market. Trying to time an exit and entry point often means missing the best days.
Bank of America looked at returns for the S&P 500 by decade, going back to 1930 and ending in 2020. Missing the ten best days of each decade resulted in a total return across the entire time span of 28%. An investor that experienced all the ups and the down by remaining invested the whole time ended up with a return of 17,715%.
They Develop a Plan
Because women are goal-based investors, they do not tend to chase returns. Instead, they focus on developing a plan that can reach their goal. They ask questions before they make investment decisions and are open to advice. The end result is often a more balanced plan, with greater diversification across asset classes. This can help ride out market downturns.
Patience is a [Female] Virtue
Patience is also key. Once a plan is in place, women tend to be more “buy and hold” investors. They are less likely to trade their accounts actively, so they may avoid higher levels of transaction costs. Over time, transaction costs can significantly bite into portfolio return, so a less active strategy can passively add to performance. A University of California, Berkeley study showed similar findings, reporting that women traded 45% less frequently than men. While men’s trading activity reduced their yearly returns by 2.65% per year, women’s reduced theirs by 1.72%.
One Thing to Watch – Keeping Too Much on the Sidelines
While being a conservative investor can preserve capital, it may also result in leaving behind opportunities. Women tend to be more conservative in their investments, resulting in a lower risk profile. When the risk profile is intentional and is part of a fully invested plan, the level of risk can be dialed up and down, depending on the market and economic outlook. Being deliberate about risk can actually lead to better returns over time, as volatility may be lower.
However, when the risk profile is low because the plan is not fully invested – meaning when the percentage of cash is too high – this can result in giving up significant returns over time.
Often, holding cash is the result of a need for financial security. Holding excess cash over and above a fully funded emergency fund may provide a sense of safety. However, it can also result in lower long-term returns. If this is a concern, creating a plan with flexibility that allows for both growth and capital preservation may help female investors get more comfortable with being all-in on an investment plan.
A New Generation Is Starting Early
A 2023 survey by Fidelity in recognition of Women’s History Month found that 81% of teen girls “would like more hands-on ways to learn about investing and personal finance.” This generation understands the value of getting involved and learning by doing. The study found that women between the ages of 18 and 35 reported an average age of 21 for opening their first brokerage account. For comparison, women 36 and older were, on average, 30 years old when they opened their first brokerage account.
The Bottom Line
Women are a financial force, and increasingly they see investing as a way to achieve their financial goals alongside career success. Starting early and sticking to the principles that make for good investors isn’t confined to women – they can be practiced by anyone.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results. This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.