Tom: Good morning, Mellody!
Mellody is president of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
Mellody: Good morning, Tom.
Tom: You are digging into the differences between men and women when it comes to money?
Mellody: Well, I want to talk about the differences between men and women when it comes to financial behavior, Tom. It really is fascinating! The differences between how the sexes approach money and investing have big impacts on the financial strategies and outcomes for women and men.
Tom: Let’s talk about how women approach money and finances differently. What sets women apart?
Mellody: There are couple big differences in the way that women approach investing and saving. The first? Women take a longer-term view than men do, and we tend to think of investing through the lenses of our non-monetary goals. For example, studies have found that women think of money in a broader context, linking it to things like security, independence and quality of life.
In terms of the longer-term outlook, women set more concrete goals, like saving for their child’s college education, or a specific dollar amount of retirement savings. Additionally, we tend to be more risk averse. Comparatively, men are less risk averse and more competitive, paying greater attention to the short-term performance of their portfolios.
Secondly, and very much linked to the first piece I just mentioned, women are more thoughtful when making financial decisions, taking more time to make decisions, and we are much more likely to ask for help. We tend to do our homework, Tom, researching investments in depth before making decisions. And women are more likely to ask for, and take, financial advice. The result? Women tend to be more patient as investors, whereas men are more likely to act on impulses and market fluctuations.
Tom: What implications do these differences have?
Mellody: There are some positives and negatives for both men and women. The tendency among women investors to focus on far-off, non-financial goals can cause us to allocate our portfolios inefficiently in the short- to medium-term. Risk aversion can also cause this, as women can emphasize downside protection, undercutting the full income generating potential of their money.
On the flip side, it should come as no surprise that men’s tendency to be impatient can cause problems as well. In the pursuit of faster, or better, investment returns causes men to try to time the market, which rarely works, especially for individual investors. A study on individual investor behavior found that women were much less likely than men to sell out of equities during the downturn in 2008-2009, which cost them when the market rebounded.
Also, because mend take a more individualistic approach, they are more likely to discard information that conflicts with their own viewpoint, meaning they can be slower to drop losing investments.
Tom: Is there evidence to suggest that one set of tendencies is better than another?
Mellody: I wouldn’t say there is a winner here, but studies do suggest that the behavioral tendencies of women help their portfolios! A seven-year study by a professor at the University of California found that single female investors outperformed single men by 2.3%, that female investment groups trumped their male counterparts by 4.6%, and that overall, women as a group bested men by 1.4%.
One of the main reasons for this is that men make 45% more trades than women do. Other studies have found similar results, showing that women-owned or managed hedge funds outperform traditional benchmarks. In the six and a half years ending June 2013, the S&P 500 gained 4.2% and the HRFX global hedge fund index fell 1.1%. However, the Rothstein Kass women in alternative investments hedge fund index returned 6%.
Tom: Do you have some pointers that everyone can follow?
Mellody: Of course! I am not going to sign off without offering a couple of tips! The first thing to do is to recognize these tendencies. As they say, half the battle is admitting you have a problem. Regardless of whether you are a man or a woman, it is incredibly important to realize that individual investors fare much worse than investors who work with investment experts, so seek advice.
This is easier for women, so that means that all you guys out there are going to have to swallow your pride and ask for directions, so to speak.
My second tip? Be aware of the risk level that is appropriate for your financial goals at this point in your investment lifecycle. If you are a young, single woman, that can mean embracing more risk in your portfolio, as you are at the beginning of your financial life. It could also mean that, if you are in your 60s and male, you should reduce your exposure.
Finally, be active in your finances! Men: you have to do your homework. And our women listeners need to be more comfortable following the changes in your investments in the short and medium terms. If you do all these things, you will be on a much better financial footing.
Tom: Alright Mellody! Thanks for your help as always!
