A rather strange quirk about the investment profession (and it seems to be across finance in general) is the proliferation of men at the top. Even when it comes to personal finance, men tend to dominate the conversation around many households. Men it turns out are masters of disaster as opposed to the universe. No matter which aspect of the two wealth wrecks of the last decade (implosion of the technology or finance bubbles) you look at, there’s a man behind it. How different would the world be if women took most of the financial and investment decisions around the house?
 To start with, women are more risk-averse than men as they value safety. Research from the US indicate that even after adjusting for age and income, women are more inclined than men to wear seat belts, get their blood pressure checked and brush their teeth. They are also less likely to cause a fatal car accident. This caution extends to money. Women are far more conscious of capital preservation, achieving a stated target rate of return and avoid incurring large losses.
On the other hand what matters most for men is beating somebody else, and bragging about it. Long term strategic thinking is someone else’s issue, and asking for advice is a sign of inferiority. Above all, worrying about risk is for sissies. Is it any wonder that the male-dominated investment world has boomed and busted every few years for more than a couple of millennia?
The evidence is clear that women can and should invest as well as men. Women tend to be less afflicted than men by over-confidence, or the delusion that they know more that they really do. And they are more likely than men to attribute success to factors outside themselves, like luck. On average, women tend to be less competitive than men, which should translate to higher investment returns as opportunities are sought more on merit.
Finance professors Brad Barber and Terrance Odean have found that women’s risk-adjusted returns beat those of men by an average of about one percentage point annually (a huge number when compounded over a long period). This measurement was over a generally bullish period for markets. In a time of falling markets, where capital preservation is of essence, women may outperform men by a wider margin.
It’s easy to see why women are more risk averse than men, for one, they have more to lose. Historically, women have earned less than men. While the gap may be narrowing, the difference will persist after taking into account the time women take out to have and raise children. Secondly, women will live on average five to eight years longer than men. Since women are perfectly well aware of the fact that they will have to live longer on less, it’s only rational for women to respond by being more cautious.
The marriage of minds should do wonders when choosing investments, should they recognise each others strengths and weaknesses, as well as their own.
Women are more likely than men to look at a larger set of alternatives, deliberate over many different choices and stick with the decision they make. This is a good counterweight to the more impetuous style of male decision-making. In the financial life, there are no prizes for making the fastest decision – but there are many rewards for making the right decision.
There’s some evidence that women have an unusual kind of sensitivity and are extremely sceptical of low-risk investments. Since investors often suffer the worst damage on investments that are supposedly the safest (think Golden Key), men should make a special point of having their wives review any choices the husbands regard as a “sure thing”.
Given their enormously demanding role around the house, women will generally choose a convenient investment option. Convenience does not always mean the solution is appropriate. Both partners should keep a tab of the rationale for their investments and hold each other accountable.
Competition among the partners is detrimental to building a sound investment portfolio. What matters is not whether one of you beats the other. What matters, instead, is whether each of you is getting both of you closer to your common financial goals for the family.
Above all, men must recognise that their wives will outlive them and need to have experience in making decisions around investing. It is irresponsible for a husband to dump something on to a wife with which she has very little knowledge or familiarity, after you are gone. And it’s dangerous for a woman not to insist on taking charge of at least a portion of the family’s money.
A team effort should make most couples wealthier. As for the answer to the perennial question, outlined in the heading of this column, some questions are best left unanswered. |
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