Women investors outperformed men in 2016

Thu, May 18, 2017, 5:48 AM

Who’s the better investor – women or men?

According to a new report published Wednesday by Fidelity Investments, on average women investors performed better than men by 40 basis points, or 0.4%, last year. (It sounds like a pittance, but over time, it can add up; as the graphic below shows.) The Fidelity survey compared investing behavior of 8 million retail customers from January to December 2016.

The perhaps not-so-surprising part of Fidelity’s findings is that when asked who they believed made the better investor this past year, just 9% of women thought they would outperform men.

Analyzing gender differences in investing is practically its own field of finance at this point. As each new study attempts to shed light on which characteristics of each gender might lead to better investment outcomes, a few common themes have emerged – and most are reflected in Fidelity’s report.

Confidence gap

Studies have consistently shown women lack confidence in their investing abilities. (The problem extends beyond financial matters.)

A 2015 Merrill Lynch report found the biggest gender difference regarding investor behavior is men women’s reported level of financial knowledge, i.e., confidence. Women in the Merrill study were far more likely than men to say they had lower levels of financial knowledge. More than half agreed with the statement, “I know less than the average investor about financial markets and investing in general,” compared with a quarter of men who said they felt the same.

A BlackRock study found that only about 48% of women describe themselves as knowledgeable about saving and investing, compared with 57% of men, and that women generally feel less comfortable making investment decisions and investing in the stock market.

^{Women investors outperformed men by 0.4% in 2016, Fidelity says}

Women save more

The Fidelity report also found that women have higher savings rates than men: looking at workplace retirement accounts, women saved an annual average of 9% of their paychecks, compared to an average 8.6% saved by men. When they looked at IRAs and brokerage accounts, Fidelity found that in proportion to their account balances, women saved more, adding 12.4% on average to their account balance, vs. 11.6% for men.

The impact of a higher savings rate (along with the 40-basis-point differential between the women’s and men’s returns) is significant when a long time horizon is factored in. Using current workplace savings rates, Fidelity illustrated the differences of starting to save and invest at various ages.

The comfort threshold

Women may be good savers, but not enough of them take the next step to invest those savings soon enough.

“Men are more comfortable to learn [about investing] as they go. Women need to feel comfortable before they begin investing,” says Kathy Murphy, president of Fidelity Personal Investing. If women want to get educated about investing before they jump in, they’re wasting precious earning time, she says.

“We worry if women don’t focus on this until they’re comfortable, they’ll be behind the eight-ball. The basics of investing are not hard – they need to get started earlier,” says Murphy.

By the way, the reason why it’s so crucial for women to save – and invest – earlier is because the gender pay gap, which is shrinking but still exists, translates into a retirement gap for women later on in life.

Women favor target-date funds

Fidelity found that women are more likely to invest in target-date funds. Fewer women also have their savings fully invested in equities than men – which speaks to men’s higher tolerance for risk. (Target-date funds gradually reduce equity holdings and increase bond holdings the closer you get to retirement, something financial advisers generally recommend.)

Fidelity compared men and women’s likelihood to buy and sell stocks in their accounts and found that men are 35% more likely to make trades than women.

Indeed, numerous studies have found that men tend to trade more frequently and therefore take on more risk. Research published in 2001 found that the excessive trading reduces men’s net returns by 2.65 percentage points a year compared to 1.72 percentage points for women. A 2015 Vanguard report found that women traded about one-third less frequently in their defined-contribution plans than men. That’s partly because investors who hold target-date funds trade very infrequently, and women are more likely to be in a single target-date fund.

One problem with frequent trading is that fees associated with frequent trading eat into any potential returns. Another: women who stick with a long-term plan and who have a long-term view “tend to do better than people who follow the hot stock, or get in and out of the market based on certain conditions,” says Murphy.

“When women do take that next step and invest, they do a really good job,” she says. “They do as well or better than men in 2016, while also taking less risk.”

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