New research conducted by Fidelity over a ten-year period found that its female customers earned an average of 0.4 percentage points more annually than their male counterparts. Ron Lieber, writing for the New York Times, reports that this difference can be seen as small but “can add up to tens of thousands of dollars more” over a few decades. This research included 5.2 million customer accounts that individuals controlled from 2011 to 2020, excluding 401(k)s, where investment decisions are made by organizations.

Lieber points out, with some seriousness and some humor, that all the titans of Wall Street have been men: Merrill, Lynch, Goldman, Sachs, Charles Schwab, E. F. Hutton, and so on. He says that it was probably a mistake that only men established the culture of investment and banking in this country “because it turns out that women are often better at investing.” He also notes that it is ironic that neither women nor men seem to be aware of this strength women have.

Why do women have better investment returns? The answer seems to be that women tend to trade less. In other words, women let their investments sit for a long time without engaging in trades while men, according to a study by Vanguard over the same decade, make trades 50 percent more than women every year. These new studies by both Fidelity and Vanguard confirm earlier research conducted between 1991 and 1996 and published in the Journal of Finance in 2000 entitled “Trading Is Hazardous to Your Wealth.” The authors Brad M. Barber and Terrance Odean found that “individual investors who traded the most earned an annual return of 6.5 percentage points worse than the overall performance of the stock market.”

Why do men trade too much? Lieber cites scholars Barber, Odean, and William J. Bernstein, a neurologist, as explaining that overconfidence produced by testosterone is the source of the overtrading problem for male investors because

  • Testosterone decreases fear, which can create unnecessary vulnerability when markets fail.
  • Testosterone increases greed, which can lead to taking too much risk.
  • Testosterone contributes to overconfidence, or having more certainty about your investment decisions than is wise.

Lieber explains how men can emulate women when investing:

  1. Make balanced investment decisions.
  2. Take a reasonable amount of risk.
  3. Leave the investment alone (not trading) until you need it. 

It’s not hard to see what can go wrong when testosterone drives investment decisions. After all, the market crash of 2008 was all about excessive risk and greed driven by predominantly male investment firms and banks: Merrill Lynch and Goldman Sachs, for example. We need more women at the tables where these decisions get made that affect all of us. And let’s celebrate this strength that women bring!

Photo by Sharon McCutcheon on Unsplash