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Practical Planning Tip: Women and Wealth - Investor Psychology

March 21, 2024

Today we’re going to continue our discussion on women & wealth. Since it is Women’s history month, The videos through the end of March will be on this topic. Specifically, today we will discuss Women & Investor Psychology:

The field of behavioral finance analyzes the limits of our self-control and how we’re influenced by our biases. This is especially true when it comes to the psychological differences between how men and women approach investing.

The first difference when it comes to investor psychology is Risk aversion: Many studies have shown that women are more risk averse than men. In fact, according to a BlackRock study, only 38% of women are willing to increase their investment risk to achieve higher returns, compared to 56% of men. Investing conservatively can be a prudent way to preserve capital if an investor has short-term goals. However, when planning for the long term, such as retirement or leaving a legacy, being too conservative is not only imprudent but can also prevent clients from achieving their objectives.

The next point is around Biases: While the term “bias” has a negative connotation, the reality is that certain predispositions can be beneficial. In the paper “Boys Will Be Boys: GENDER, OVERCONFIDENCE, AND COMMON STOCK INVESTMENT” by BRAD BARBER AND TERRANCE ODEAN, published in The Quarterly Journal of Economics, the authors found that investment accounts owned by women outperformed those of men. Overconfidence caused men to trade 45% more frequently than women. The combination of trading costs, taxes, and the quest to outperform contributed to reducing men’s returns by 2.65% annually as opposed to 1.72% for women.

And here’s a Financial Planning tip to consider: Men’s tendency to move things around doesn’t only apply to trading. It also applies to staying the course with other investment strategies. The best approach to investing is a disciplined process that the client will stick with over the long term. Women’s discomfort with risk, but tendency to trade less frequently, is in stark contrast to men and requires a different approach. Consequently, financial advisors should spend more time with women discussing risk and its ramifications, while they can spend LESS time emphasizing the importance of staying the course and trading less. These small differences can lead to big benefits over a multi-decade time horizon.

In my practice, I’ve had a more difficult time getting women to START investing, then I do men. HOWEVER, once a female client buys into my philosophy and my process, I spend very little time encouraging them to stick WITH our process and their portfolio. It is much easier for them to ignore the noise. However, with some male clients that I work with, this is an ONGOING STRUGGLE. I constantly need to remind them to stick with our predetermined process and dissuade them from taking the absurd advice from friends or their brother-in-law. I RARLEY, have these issues with my female clients, which, in some respects, make them far easier to work with AND is what helps them build wealth more consistently over time.


You can WATCH the full video here.