By Nicole van den Munckhof
Women investors hold the edge over their male counterparts, outperforming their male counterparts because they are more risk averse, tend to remain invested for the longer term and don’t switch out of investments as quickly as men.
According to the latest investment and behavioural research, women have several positive behavioural traits that serve them well as long-term investors.
Investors often tend to sell low by switching out of investments that are performing poorly and buy when prices are high when investments are doing well, which erodes their investment returns. The cost of switching between investments is often overlooked.
Switching between investments refers to the availability bias, according to Behavioural Finance & Satisfaction of Life research done by the North-West University. It is the overestimation of the probability of an event occurring based on the most available information. This causes investors to overreact to market news and often change their long-term investment strategy.
Behavioural finance is a field of study that seeks to understand the decision-making process regarding investing and the emotions and blind spots that drive investor behaviour. Ultimately, it attempts to understand why and how people make irrational financial decisions.
These irrational decisions are anchored in the person’s cognitive biases. For example, women, who are more risk averse, tend to remain invested and outride short-term volatility, which ultimately leads to superior long-term investment returns.
The 2021 Women and Investing Fidelity Investments research shows that women outperform male investors by 0.4% measured over a 10-year annualised return due to cognitive bias. While this outperformance may seem trivial, over an investing lifetime, the compounding impact of this outperformance is that women can retire with 20% more capital than men, all else being equal.
So, empirical evidence reflects that women are better investors than men.
The Fidelity study also aimed to provide insight into women’s behaviour when managing their financial investments and how this differed from their male counterparts.
The study found that more men invest than women. However, favourable statements from the research show that 50% of women stated they were more interested in investing since the start of the Covid pandemic.
The percentage of women who invest in investments outside retirement funds increased to 67% in 2021 from 44% in 2018.
Women need to take charge of their finances and use their different cognitive biases to their, and their household’s, advantage.
What is important is what we can learn from each other to ensure and enable better investment decisions and greater financial freedom.
Men can learn from women’s general attention to detail and their think-before-you-act attitude. In contrast, women can learn from the male bravado – to be less fearful of making mistakes and more confident in their capabilities.
Irrespective of our differences, every individual must participate in their financial journey. No one is more invested in your financial freedom than you.
Invest in your financial freedom
Women tend to outlive men, and with South Africa’s divorce rate at 17.6%, it is critical that women have their own investments and that they also are involved in their husband’s financial planning decisions.
If you are not earning a salary, then you should discuss a savings allowance as part of your monthly income from your spouse. It will allow you to build up a credit record to access future credit, such as a home loan, and help secure your financial future.
Women should partner with a professional who understands their individual needs but also, importantly, is cognisant of their own biases.
Women must build their financial self-esteem and take control of their financial freedom and investment future. This can be achieved by partnering with someone who speaks to your interests and understands your specific needs.
Investment tips:
1. Have a long-term investment plan. Partnering with a professional can help.
2. Do research and ask questions – always get a full breakdown of all fees.
3. Set up monthly debit orders for all of your investments. This will be the best investment advice you have ever received.
4. Keep track of your finances – what is not measured can’t be managed.
5. Review your long-term investment plan biannually to ensure you are on track to achieve your objectives.
Nicole van den Munckhof is a Certified Financial Planner at Independent Securities.