Tuesday 29 June 2021 11:42 am CFA Institute Talk

5 Myths about Women and Investing

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Barbara Stewart, CFA, is a researcher and author on the issue of women and finance. She released the 11th installment of her “Rich Thinking” series of monographs on International Women’s Day, 8 March 2021. Stewart uses her proprietary research skills to work as an Executive Interviewer on a project basis for global financial institutions.

I recently participated in a lively podcast with two fellow women in investing, Jane Barratt, who is chief advocacy officer of the fintech MX, and Meredith Jonesauthor of ‘Women of The Street: Why Female Money Managers Generate Higher Returns’.

Our conversation, hosted by alternative investment platform YieldStreet, explored some of the misconceptions about women and investing. These are abridged excerpts.

Myth 1: Women Are Not Confident as Investors

Barbara Stewart (BS), CFA: Even some of the most financially educated and capable female professionals put themselves down when describing their skills. But is self-expressed confidence even relevant? I would argue ‘no’. Women are incredibly competent investors and we have lots of data on that, which is what matters.

Jane Barratt (JB): Maybe it’s not that women are under-confident, maybe men are overconfident.
Australians have a thing called ‘tall poppy syndrome’: if you stick your head up too high, the head of the poppy gets cut off. That is very true for women in business: most women in social surroundings won’t pop up and say, “I’m a rockin’ investor”.

Meredith Jones (MJ): No column or book about gender and investing is ever complete without citing Brad M. Barber and Terrance Odean’s study, ‘Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.’ They looked at investing behaviour in 35,000 brokerage accounts and found that the women in their sample actually outperformed. The reason they outperformed was because the men in the sample were all overconfident and overconfidence when you’re investing, leads you to believe that every decision you make is a good one. As a result of that overconfidence, men’s returns were eroded due to overtrading.

Myth 2: Women Are Risk Averse

BS: Women aren’t risk averse — they are risk aware. That’s the best phrase I’ve ever coined. I think that rephrasing is very important for a couple of reasons: first, ‘risk averse’ is a very demeaning term; and second, being ‘risk aware’ is an incredibly positive skill. What I have found through my research is that as long as a woman is interested and an opportunity is aligned with her values, she will be motivated to take a risk. I did a global study in 2019 to test the numbers and I gave women a broader selection of choices: ‘are you a risk seeker, risk taker, are you risk aware or are you risk averse?’. Fewer than 10 per cent of women said they were risk averse.

MJ: A lot of research shows that there is a difference between how men and women weight probabilities. One interesting study (cited in my book) asked women and men to estimate what they thought they would pay for a new car (and then sent them out to buy the car). Overall, the prices paid were pretty similar, but the deals that the men thought they were going to get were much more substantial than the deals that the women thought they were going to get. If you have outsized expectations, it’s going to cause you to take more risk. Matching expectations with reality can result in a more muted risk profile but can also deliver very consistent returns over time.

JB: I think there is an inherent flaw with KYC (know your client) when a person comes on as an investor, especially as a relatively inexperienced investor. When did they get the chance to build their risk awareness or their risk tolerance? I always talk about them as risk muscles and the more that you use them and the better you feel, the better developed the muscles will be. I think changing the conversation — from talking about risk as a static thing, to risk as a muscle that can be developed over time — is really important.

Myth 3: Women Are Not Good Investors

BS: Whether or not they ‘feel confident’, women are, in fact, competent investors — and studies show that. A 2018 study of 2,800 investors by Warwick Business School showed that while annual returns on investments for men were on average a marginal 0.14 per cent above the performance of the FTSE 100, annual returns on the investment portfolios held by women were 1.94 per cent above it.

MJ: The statement that women are not good investors makes me crazy. In the generational wealth transfer, women control 51.3% of the investable wealth in the US. That number is going up to 66% by 2030, so we have got to get away from the myth that we’re not good at this because we’re about to be in it. Also, if you believe that you’re not good with money that becomes a self-fulfilling prophecy. It’s going to be critical that we all get to the point where we’re confident enough in our abilities.

JB: Women make investment decisions all the time – there is so much competence in investing as a skill across the spectrum of life. But across the board, there is this idea that an investment mindset applies first and foremost to the market and that all other types of investment decisions are fluffy. This is completely unfair! Just because you might not know what a P/E ratio is, it doesn’t mean you will be a bad investor.

Myth 4: Women Are Not Financially Literate

BS: This gem was hidden inside a 2018 FINRA (US Financial Industry Regulatory Authority) report: ‘Women may answer “Don’t know” more often when surveyed. This could result from women being more open to assistance or less confident than men, or it could reflect men being overconfident in their self-reporting. After removing respondents who answer “Don’t know” from the analysis, the gender gap in financial literacy narrows for boomers and Gen-Xers and nearly disappears for millennials.’ If women don’t know, we’re going to say we don’t know whereas a man might be more inclined to take a guess. If we remove the ‘Don’t know’ box, then we’re more or less equally financially literate.

JB: There is no substitute for a behavioural change and financial education can offer a starting point. You might find out about virtual investing platforms where you can practise without putting any money at risk. This way you can start to build those money muscles or risk muscles before you invest real money and you can learn the magic of compound interest. My best advice would be to just start and learn as you go.

MJ: Financial literacy results from education and exposure. I think that one of the main reasons I’m here is that I had a school teacher who had us all start trading paper portfolios! Second, my mom made the colossal mistake of allowing me access to a very small inheritance (from my great uncle). I started having conversations with a broker when I was not yet able to drive. I took some of what I learned trading my paper portfolio in seventh grade, but I did quite a terrible job of managing my money. I’m glad to say that my money habits have evolved significantly since.

Myth 5: Women Are Not Interested in Investing

BS: Actually, what women are ‘not interested in’ is the poor communication style of an archaic investment industry. Charts and graphs feel dry and dull to most women (and a fascinating secret is that many men feel the same way!). Women prefer to talk about money matters in a more grounded way, with a view to how a financial situation or an investment is likely to affect their family and lifestyle.

JB: At some point, I will do a ‘wall of shame’ of comments when I was fundraising for my ‘investing for beginners’ platform. Everyone assumed the platform was for women – I’d explain that it was for beginners. Technology is a leap forward towards the closing of the gap. And another thing that helps? If you no longer have to show up in a leather-panelled office to talk about money. That type of environment is so impenetrable – almost military-esque in its language around investing. The industry has been so lazy by targeting only male boomers – every ad shows a ‘silver fox’ guy on the beach with his wife just smiling cutely beside him

MJ: One thing that has made it difficult (perhaps) for women to be as interested in investing and finance is if they are being systematically ignored. I have industry friends who have to remind colleagues to speak to the women when they are dealing with couples. You can’t leave women out of a couple’s conversation and expect them to be happy. The proof is that something like 70 per cent of widows fire their financial adviser when their husband dies.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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