While the investment industry has often been viewed as a male-dominated space, an interesting insight from empirical research is that women, on average, tend to be better investors than men, earning as much as one percent more annually.1
A few of the findings on this:
- Women outperform men by about one percent per year, according to a seminal 2000 study in The Journal of Finance by researchers Terrance Odean and Brad Barber.1
- Women save more than men (0.4 percent), and their investments earn about 0.4 percent more than men annually, according to a 2017 Fidelity study of 8 million investor accounts.2
- The Warwick Business School surveyed 2,800 investors over a 36-month period. The group of women outperformed males in the study by about 1.8 percent per year.3
Many reasons have been posited for why this is the case, from greater conservatism on the part of women to more frequent use of diversifying mutual funds. But one cause in particular pops up frequently in the research and was cited heavily in the Barber and Odean paper: Simply put, women trade less than men. The authors found that frequent trading detracts from returns over time.1
So, what has happened since Barber and Odean studied this so many years ago? The advent of commission-free trading has lessened the damage from a transaction cost perspective, but on the flipside, new technologies have made it easier than ever to act on our wealth-damaging whims. Here are some recent trends:
- More people are trading / investing than ever before. Because of the ease of access, number of brokerage apps (Stash, Acorns, Robinhood, Webull – to name a few), targeted marketing, and gamification, owning stocks has been more popular than it’s ever been. Research by Envestnet | Yodlee suggests new users to brokerage accounts have been up substantially starting in March of last year – stock trading was seemingly one of the big uses of the government’s COVID relief checks.
- More members of Gen Z have a brokerage account than a credit card. According to research from Seeking Alpha and NerdWallet, 58 percent of Gen Z have brokerage accounts, but only 56 percent have credit cards.4, 5
- A bull market, combined with social media, has elevated FOMO. People have been suffering from social anxiety caused by watching peers post through a carefully curated lens on social media. Think of the few lucky people who won on GameStop and the number who have read those posts and wrongly concluded that it’s easy to make money in the market.
Combine all of this with an easily accessible bull market, and you have a recipe for exponential growth of uneducated investors trading on impulse.
So, what can we do about this unfortunate disconnect? We believe financial advisors have a place to step in, to promote safe investing and trust in the financial services system. Unfortunately, our education system in the United States often does not stress the principals and best practices of finance. One of the most straightforward investment lessons of the last several decades is that the markets are highly efficient at setting prices and that therefore, beating the market return by picking your own stocks is extremely difficult to do over time. Being less likely to trade, women have done a little better on this front on average. But how many people have any idea that a great deal of financial science suggests that a broadly diversified market index is a fantastic way to earn money over time? And, it doesn’t require you to be monitoring and trading your investments on a regular basis. Indeed, you are highly likely to be better off if you don’t.
We can all be better investors, but plenty of us simply don’t know what we don’t know. This is an opportunity for financial advisors to shine. The education and discipline you can bring to your client relationships can curb detrimental trading and help ensure a better investment experience over time.
- Brad M. Barber and Terrance Odean, “Trading is Hazardous to Your Wealth,” The Journal of Finance, Vol. LV, No. 2, April 2000.
- “Who’s the Better Investor: Men or Women?,” Fidelity.com, last modified on May 18, 2017, https://www.fidelity.com/about-fidelity/individual-investing/better-investor-men-or-women/.
- “Are women better investors than men?,” The Warwick Business School, last modified on June 28, 2018, https://www.wbs.ac.uk/news/are-women-better-investors-than-men/.
- “Does Gen-Z Care About Investing,” SeekingAlpha.com, last modified on June 22, 2020, https://seekingalpha.com/article/4355033-gen-z-care-investing.
- Erin El Issa, “Gen Zers: How America’s Newest Adults Are Doing Money,” Nerdwallet.com, last accessed on March 4, 2021, https://www.nerdwallet.com/blog/generation-z-money-survey/.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
Dana D’Auria, CFA, Co-Chief Investment Officer
As Co-Chief Investment Officer Dana plays a key role in the ongoing growth and alignment of Envestnet’s fiduciary solutions, as well as its research, overlay, and portfolio management resources. Ms. D’Auria, a member of Envestnet | PMC’s Investment Committee, has nearly 15 years of experience managing and implementing investment solutions for wealth managers.