Most self-appointed super-investors have two things in common: they’re male, and they’re selectively delusional. Too many men, unfortunately, see Warren Buffett in the mirror when they shave. Not so with women, for obvious reasons.
This week, I learned about an uncanny number of market-beating males while reading my students’ blogging reports. I’m teaching high school Personal Finance. My students are journaling their learning, connecting it to online articles and discussing their findings with mom and dad. Oddly, based on my students’ reports, many of their fathers are beating diversified portfolios of low cost indexes. Their mothers, I’m finding, make no such claims.
Most active investors fail to properly compare the results of their portfolios with a diversified basket of low cost indexes. Beating a passive portfolio over an investment lifetime could be tougher than a weekend golf warrior humbling Jack Nicklaus.
From 1988-2005, the FutureMetrics consulting firm found that 70 percent of U.S. pension funds underperformed a blended portfolio of stock and bond indexes. Fund managers are full time investors. No other day job. And they pay a fraction of the fees that the average retail investor pays. Yet most still lose to the balanced market, joining the majority of hedge fund managers in the process.
So why are so many of my students’ fathers beating passive portfolios when most of the world’s professional investors fall short? Let’s boldly suggest that they’re mistaken.
Ironically, despite their humility, my students’ mothers might be better investors. During the tumultuous period between 2005 and 2010, Vanguard found that its female clients earned 5% more than its male account holders.
Women tend to be more conservative, holding higher bond allocations. So you might expect women investors to beat men in periods where conservative bonds beat stocks. But women trounce men during bull markets as well. University researchers Brad Barber and Terrance Odean studied 35,000 household brokerage accounts between 1991 and 1997. Despite the soaring market--where higher risks can mean higher rewards—women upstaged men by nearly three percent per year on a risk-adjusted basis
A 2005 Merrill Lynch investment survey reveals that men commit more portfolio violations than women, which might explain their weaker investment results. Shunning the safety of diversification, 32% of men are more likely to allocate too much money to a single investment, versus 23% of women. According to Merrill Lynch, men are also two times as likely to blindingly charge into an investment without doing the research. Male pattern overconfidence, it seems, is as common as receding hair.
Unfortunately, no Rogaine trading strategy is likely to alter results. Men swerve in and out of investment styles by excessively trading, rather than sticking to a boring, but more profitable, buy and hold plan. Barber and Odean found that men trade 45% more frequently than women. Such activity increases trading costs, has higher taxable liabilities and reduces returns.
Portfolio hyperactivity, however, isn’t reserved for amateur men. In a study of male and female fund managers, investigators at the Center for Financial Research in Cologne, Germany revealed that returns between the sexes (before fees) were similar, but male managers traded more frequently—ensuring higher transaction costs and greater taxable penalties for fund holders.
In the testosterone world of hedge funds, men lose as well. According to Dan Abrams, author of Man Down, the real masters of the universe are women. Hedge funds have a high mortality rate, but surviving funds managed by women between 2000-2009 generated 9% per year, compared to the 5.82% that men earned.
Are women better investors than men? The evidence seems to suggest so. But guys….let’s keep this between us.