"Risk on, risk off" might be the most essential hallmark of the current market, but just focusing on the day-to-day whims of capital markets ignores longer term changes to investor risk preferences. Nic Colas, of ConvergEx looks at the topic from the vantage point of gender-specific investment choices. For example, more women are participating in deferred compensation (DC) plans, and the data from millions of 401(k) accounts tells a useful story. Their retirement accounts still lag those of their male counterparts in total value and they remain a bit more risk-averse. But for the first time in at least a decade they are more likely than men to contribute to a retirement account and are contributing a greater percentage of their earnings. Pulling in some other academic work on the risk preferences that create the “Venus/Mars” divide dovetails nicely with investment specific analysis: women may not “Know” as many of the grimy details of investing or shoot from the hip as much as their male counterparts but they know when to cut their losses and they tend to be more methodical. Lastly, we can’t help but wonder how much of the much-discussed money flows into fixed income versus equities has to do with the shifting gender profile of the “Average” American investor. “Risk off” may well be “risk shift.”
Note from Nick: Men may be from Mars, and women from Venus, both they both want to make something on their investments. You’ll never see pink or blue dots on the “Efficient Frontier” of academic models, to be sure. However, both empirical data and psychological studies do point to subtle – but notable – differences in how men and women consider the classic risk-reward tradeoff inherent in the challenge of investing. Beth picks up the thread from here.
She was savvy, she was smart, and she was a moneymaker. And now she’s on the move. Mrs. Watanabe, the market’s metaphor for Japan’s housewife currency speculators, was a star of the yen’s glory days in the early 2000s. Dedicated salaryman “Mr. Watanabe” made the money, sure, but it was his wife who controlled financial decisions. And a decade ago, she was the “Whale” of the yen-denominated currency market.
The reason she was so active was that she was looking for better yields than those on offer in low interest rate, newly deflationary Japan. She wanted a safe return, yes, but to make a little bit extra as well. Which turns out to be a common female approach to investing as we’ll outline today. (Just in case you’re wondering, “Watanabe” is the fifth most common Japanese surname, equivalent to “Brown” in the States.)
This same sort of female investment psychology has been documented in the Mrs. Browns of America. We turn to a 2011 report regarding “How America saves,” courtesy of The Vanguard Group’s research department. The report highlights data on defined contribution (DC) retirement plans, which represent the centerpiece of the American private-sector retirement system. More than 60 million US citizens are covered by such plans – predominately 401Ks – and assets now exceed $4 trillion. Vanguard is a large player in this market, and their data aggregates information from millions of individual accounts.
Since our focus is on male versus female investing habits, we note the following 3 gender-oriented takeaways from the data in the report.
- Financially-speaking, the last recession had a larger impact on the savings patterns of women than men. Prior to 2008, DC participation rates for men topped those for women by up to 3 percentage points. The gap closed to 1 percentage point by 2009, and by 2010 68% of women were DC plan contributors, compared with 67% of men. On average men earn more money than women – 25% more according to the latest government data – which is one explanation for their historically greater propensity to establish retirement funds.
- A similar pattern occurred with deferral rates. In the 3 years before the financial crisis, men contributed a greater percentage of their incomes to retirement plans, but in 2009 and 2010, women were larger contributors than their male counterparts (6.9% versus 6.7% in the latter year).
- Men are more likely to contribute the maximum allowable amount to their retirement funds. In 2010 (the most recent year for which data is available), 9% of men deferred the maximum amount allowed by company policy, compared with 7% of women. Coupled with the fact that men make more money than women on average, this explains the substantial gap in retirement fund balances. The average male has a balance of $96,000 which the average female has just $59,000. Median amounts for men and women are $34,000 and $21,000, respectively. And yes, you read that right. The typical American of either gender has only about $26,000 saved for retirement.
- Women are more risk-averse than men – as you’d likely guess – but probably not by nearly as much as you’d think. 69% of men’s’ retirement assets are in equity, compared with 67% of women’s. Conversely, 10% of women’s assets are in bond funds, compared with 9% of men’s. Keep in mind this is post-recession data, so it very well could be that differences in asset allocation patterns were once greater.
To cast a larger net over the topic of gender and investing, let’s tread a little closer to the slippery slope of stereotypes, albeit with the aid of some academic studies related to male-female behavioral patterns. A few points here:
- Every investor knows that the knife’s edge of decisionmaking is labeled “Confidence.” Just enough, and you kill it. Too much or too little, and it kills you. And simply put, women seem to be less afflicted than men by overconfidence. I might be walking a fine line (with readers of both sexes) with that statement, so here’s one piece of evidence everyone can relate to: Women have been shown to be 40% less prone than men to speed through yellow traffic lights. In other traffic-related statistics, men are also 3.41 times more likely to receive reckless driving citations than women and 3.09 times more likely to receive a DUI. And traffic accident fatalities? Well, they’re 70% men. By taking more risks behind the wheel than women, men are more likely to get into serious crashes.
- Men are also more competitive and place a greater emphasis on performance. A survey of first-time marathoners asked runners why they entered the race and if they would run another. Men more often said they wanted to see how high they would place and/or how fast they could run, while women were more likely to cite health and well-being goals as reasons for entering.
- Meanwhile, Niederle and Vesterlund conducted an experiment (“Do Women Shy Away from Competition, Even When They Can Win?”) in which men and women were given in a test that required them to add as many 5-digit numbers as possible in 5 minutes. Afterwards when participants were told only their raw score and not their relative ranking, 75% of men guessed they had been the best in their group compared with 43% of the women.
As for the financial world, a 2001 study by Brad Barber and Terrance Odean (“Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment”) showed that men traded stocks almost 50% more than women. The findings suggest that overconfident investors are more apt to interpret what’s going on around them and react to short-term financial news. Women are more cautious, especially in the wake of the recession, and it shows in their current saving habits. For the first time ever, they’re more likely to contribute to a 401(k), and even with lower incomes, they’re contributing a greater percentage of their earnings than are men.
You can read the full report here: http://faculty.haas.berkeley.edu/odean/papers/gender/BoysWillBeBoys.pdf [11].
Along the same lines, women are generally less knowledgeable and interested investors than men, but they also make fewer mistakes and are less apt to repeat the mistakes they do make. All this according to a study by Merrill Lynch Investment Managers (http://www.ml.com/media/47547.pdf [12]). Forty seven percent of women reported not being knowledgeable about investing, compared with just 30% of men. Women were significantly less likely to know what “dollar cost averaging” means (39% of females versus 65% of males), and they also were less likely to correctly identify historical inflation rates (43% versus 67%).
However, women are less likely than men to hold a losing investment too long (35% versus 47%), buy a hot investment without doing any research (13% versus 24%), and allocate too much capital to one asset (23% versus 32%). When it comes to repeating mistakes, women were less likely to report repeating the following: buying a stock without doing any research (47% of women versus 63% of men), waiting too long to sell an investment (48% versus 61%), and ignoring the tax consequences of an investment decision (47% versus 68%).
So women are less confident and more risk-averse when it comes to investment decisions, but they’ve also shown to be more prudent. Why? Well, a 2010 New York Times article (http://www.nytimes.com/2010/03/14/business/14mark.html?_r=1&adxnnl=1&adxnnlx=1338484453-jmoi1rSaFjCeVgDOrh2UWg [13]) quotes Alexandra Bernasek, an economics professor at Colorado State University, as saying that historical disparities in earnings, power, wealth and social status could explain certain behavioral differences. As could evolutionary behavioral patterns that pre-date recent history. Aggressive risk-taking likely once helped men find mates, while women were more risk-averse because their role was to protect their offspring.
However, research out of the University of New Hampshire (http://www.unh.edu/news/cj_nr/2011/jul/lw20venture.cfm [14]) shows that gender stereotypes affect the investment decision-making of women, often resulting in counterintuitive results. Researchers found that when a group of angel investors was less than 10% women, then the group as a whole was more cautious about investing. But when women comprise more than 10% of the group, investments increased. Researchers pointed to a psychological theory called “stereotype threat” to explain this finding; when a stereotype exists about a person, that person will behave in a manner consistent with the stereotype when they’re in a situation that highlights the stereotype. As the number of women in angel investor groups increased, the stereotype of women as cautious investors became less apparent and they were more recognized for their ability as investors.
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Now, what does this all mean? The increasing share of individual savings and investments managed by women is one overlooked driver of the continued rally in “Risk-off” assets. Assets controlled by women are clearly increasing. Patterns in labor force participation rates for women mean they have more money to invest directly in assets such as 401Ks. Also, divorce rates have increased over the last 30 years, as has the number of women-led households. In summary, it makes sense to reconsider the notion that continued money flows into bonds and other safe haven investments is really “Risk off” market behavior. At least a piece of it may well be “Risk shifting,” driven by the demographic and psychological factors I have outlined here.