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Why women inch ahead of men in the investment game

Chad Anderson/Getty Images/iStockphoto

A recent RBC Direct Investing poll found that 61 per cent of men agreed that they were good investors, but only 47 per cent of women thought similarly of themselves.

Perhaps that helps to explain why academic researchers in another study found a general underperformance of more than one percentage point a year on investment accounts of men versus women.

To put that into context, a 1-per-cent annualized difference in returns for investors contributing $250 a month for 40 years can translate into more than $100,000.

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One theory to explain the gender-based differences is that overconfidence leads to increased trading, which can lead to underperformance.

During the 2000s, Chicago-based Hedge Fund Research found that women-managed hedge funds earned almost double the returns of the category average (9.06 per cent versus 5.82 per cent). During the financial crisis, they lost roughly half as much as all other hedge funds (9.61 per cent versus 19.03 per cent). Maybe these women-managed funds represented only about 3 per cent of all funds, but it's still hard to ignore the headline numbers.

The RBC poll also suggested that women's engagement with investing is event-driven, such as putting their children through postsecondary education, whereas men are more guided by hitting a target number.

Personally I see the two motivators as completely congruent. If your motivation is postsecondary education for your children so that they emerge debt-free, does that not then require estimating how much money they will need?

A focus on an event might be more meaningful and lead to less risk in a portfolio. The fear of not having enough money to put a child through school might be top of mind for women, whereas men might have a tendency to try to see how much more they can end up with.

Maybe junior can go to Harvard if the portfolio is a bit more aggressive. Of course, taking on more risk is no guarantee of more return; only the potential for it.

The same study that found the one-percentage-point performance difference also found that the margin was exacerbated in singles. Single women outperformed single men by more than two percentage points a year.

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But maybe two heads are even better than one.

I've seen many couples where one person dominates the investment decisions and the spouse takes a distant back seat.

I once met with a couple and the wife left the room once we started talking about their investments. She was convinced she would never make heads or tails of it.

Ironically, the husband had multiple binders filled with many different strategies and analyses about investing and I would argue that he was actually the confused one. He traded regularly and the transaction fees were killing them.

Sometimes a portfolio is like a bar of soap. The more you touch it, the smaller it gets.

I asked him what his rate of return was on his overall portfolio, and he had no clue. Eventually I persuaded them to both take part in the investing decisions. They ended up with a simpler, safer portfolio that he was no longer allowed to tinker with. She wouldn't let him.

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The savings on fees alone were worth it, but this was just before the financial crisis and they lost a lot less with their new portfolio than if they had stuck to his hodgepodge of investing strategies.

What's a 1% difference in return worth?

$250/month invested over 40 years:

With a 5% rate of return: $381,505

With a 6% rate of return: $497,873

Difference: +$116,368

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