Market Research

The Key to Investing—The Gender Factor

Contributing Editor, April 19, 2005

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Women make fewer investment mistakes than men and make them less often, despite the fact that, on average, they tend to know less about inve...

Women make fewer investment mistakes than men and make them less often, despite the fact that, on average, they tend to know less about investing and enjoy investing less than men, according to a survey conducted in the US by Merrill Lynch Investment Managers and the research firm Mathew Greenwald & Associates.

“Men and women approach many things differently - investing is just one of them,” said Robert Doll, chief investment officer of MLIM. “Our survey brings a new perspective on the attitudes, knowledge and emotions that inform investor mistakes. Male or female, our point is this: Understand the motivations and emotions that inform your decision making and you can make better, more profitable investment decisions.”

The survey found that women are far less likely than men to hold a losing investment too long (35 per cent of women reported having done so at least once vs. 47 per cent of men) or wait too long to sell a winning investment (28 per cent vs. 43 per cent). Men are also more likely than women to allocate too much to one investment (32 per cent vs. 23 per cent), buy a hot investment without doing any research (24 per cent vs. 13 per cent) and trade securities too often (12 per cent vs. 5per cent).

According to the survey, men cite holding a losing investment too long as their most painful mistake, while women say not starting to invest early enough was their most painful mistake.

“Men tend to make what we call the 'glamorous' mistakes like riding winners down, holding onto losers, buying on a tip or putting too much money in a single investment,” said Hannah Grove, chief marketing officer of MLIM. “These mistakes may make for interesting cocktail party conversation, but in the greater scheme of things, it's the bigger, systemic failures like ignoring their asset allocation that do the greatest damage to investors' portfolios.”

Not only do women make fewer investing mistakes, they are much less likely than men to repeat the same mistake twice.

Of men who reported buying a stock without doing any research, 63 per cent said they did it again, whereas only 47 per cent of women repeated the mistake. Nearly half (48 per cent) of all women who waited too long to sell an investment did it again, but 61 per cent of men repeated the mistake. And among men who ignored the tax consequences of an investment decision, 68 per cent did it more than once while only 47 per cent of women did.

A significantly greater percentage of women (47 per cent) than men (30 per cent) report not being knowledgeable about investing, according to the MLIM study.

Among six knowledge questions asked, women were significantly less aware of what dollar cost averaging is (39 per cent of women vs. 65 per cent of men) and were less likely to correctly identify historical rates of inflation (43 per cent vs. 67 per cent). Yet women are more likely than men to describe themselves as a "very successful" investor (19 per cent to 14 per cent) and are more likely to say they do a "very good" job of managing their investments (34 per cent to 25 per cent).

“Women are savvy about investing. If a woman isn't a financial expert, she's going to seek and heed professional advice,” said Caroline Gundeck, director of women's business development at Merrill Lynch. “We have found that women want to work with an advisor to build a long-term financial plan. A woman's planning-oriented approach and propensity to seek professional advice contribute to her long-term investment success and provide her with a greater sense of overall financial satisfaction.”

The survey found that men enjoy investing more than women (69 per cent vs. 55 per cent). This is reflected in the fact that 60 per cent of women say they prefer to spend as little time as possible managing their investments (vs. 49 per cent of men).

Asked about the emotions that played a role in the investment mistakes they would made, men are more likely than women to cite greed (32 per cent of men vs. 16 per cent of women), overconfidence (33 per cent vs. 20 per cent) and impatience (28 per cent vs. 19 per cent).

Men and women share many of the same motivations for wanting to be good at managing investments, but where they differ is the degree to which they say these motivations drive them. Both men and women cite the desire to have a comfortable retirement as their primary motivator, however, more women than men cite this (88 per cent vs. 78 per cent).

More women also cite wanting to be financially independent (80 per cent vs. 67 per cent) and having money to spend on the things they want (45 per cent vs. 37 per cent) as “very important” motivators.

These results mirror those found in another study done by Grove and Russ Alan Prince, “Women of Wealth”, where 76 per cent of affluent women cited “do not want to be dependent on anyone else” as their primary motivation for investing.

Analysis done on the survey results by Merrill Lynch Investment Managers and Mathew Greenwald indicates that investors fall into four distinct investing personalities: measured, reluctant, competitive and unprepared.

Of these four categories, women are more likely than men to fall into the reluctant or unprepared categories (investors in these categories tend to not enjoying investing and are generally less knowledgeable about investing) while men are more likely than women to be identified as competitive or measured investors (the categories associated with investment knowledgeable and confidence).

Of the 1,000 investors surveyed, 32 per cent were identified as measured, 26 per cent as reluctant, 17 per cent as competitive and 11 per cent as unprepared; 14 per cent did not clearly fall into a category.

  • Competitive Investors (17 per cent of all investors; 60 per cent male, 40 per cent female)

    The clearest gender distinction among the personality types was with the Competitive investor. Sixty per cent of Competitive investors are male. Competitive investors enjoy investing, try to beat the market and are the most likely to have chased a hot investment. Competitive investors also have high knowledge levels about investing, which, as discussed above, is something 47 per cent of women say they do not have.

    These investors are the most likely of the four types to have started investing early, and they say that they are both happy with their current financial situation and confident in the future. This group likes to invest as much as possible and rebalances regularly (only 12 per cent have gone more than 18 months without rebalancing).

    Mistakes Made: Forty-six per cent of Competitive investors have a hard time letting go of losing investments. Thirty-nine per cent said they had put too much of their portfolio into one investment. Competitive investors are most likely to be overconfident (39 per cent) and greedy (34 per cent), but they are least likely to feel apathy (18 per cent) when it comes to investing.

  • Measured Investors (32 per cent of all investors; 55 per cent male, 45 per cent female)

    This is the largest group of investors. While men predominate, women are more likely to be Measured investors than any other type. Secure in their financial situation and confident they will have a comfortable retirement, Measured investors have achieved their success because they started investing early in life and invest and rebalance regularly.

    As a rule, these investors do not try to beat the market or over-allocate to a single investment. Measured investors are the least likely to say they waited too long to start investing or have not invested enough. They are also least likely to be plagued by the emotions that commonly cause investment mistakes: fear (14 per cent) and anxiety (13 per cent).

    Mistakes Made: Even the most methodical and even-keeled investors make mistakes. Measured investors often have a hard time letting go of losing investments. This was the most common mistake cited by Measured investors (41 per cent) and nearly one-third of them cited this as the most painful mistake they would ever made.

  • Reluctant Investors (26 per cent of all investors; 53 per cent female, 47 per cent male)

    It's no surprise that more women than men are Reluctant investors given that 60 per cent of women (vs. 49 per cent of men) say they want to spend as little time as possible managing their investments. Among Reluctant investors, 92 per cent stated this, versus just 27 per cent of measured investors and 35 per cent of competitive investors. Still, Reluctant investors say they are happy in their current situation and believe they will have a secure retirement.

    Reluctant investors' general satisfaction with their circumstances may be attributable to the fact that they are the most likely of the personality types to have a primary financial advisor. They have other notable strengths, as well. Only 32 per cent of Reluctant investors said they have held losing investments too long and only 25 per cent of them said they have over-allocated into one investment.

    Mistakes Made: Seventy per cent of reluctant investors said they waited too long to start investing and 41 per cent of them identified this as their most painful mistake.

  • Unprepared Investors (11 per cent of all investors; 53 per cent female, 47 per cent male)

    Women's lesser knowledge and interest in investing may explain why this category skews slightly towards the female. Unprepared investors are not happy with their current financial situation. They are the most likely to lack confidence (47 per cent) and be fearful (41 per cent) or anxious (36 per cent) about investing. In general, they have lower knowledge levels on financial topics and express the deepest regret about not investing sooner (57 per cent see this as a major regret). They do not feel they will have a secure retirement - with reason.

    Mistakes Made: Unprepared investors are the most likely to say they waited too long to start investing (75 per cent) - which they most commonly cite as their most painful mistake - and they are the most likely to say they have not put enough money into their investments (60 per cent). They are very likely to hold on to losing investments too long (56 per cent), allocate too much of their portfolio to one stock (45 per cent) or chase a "hot investment." They are the least likely to rebalance their portfolios. While a smaller group among the relatively affluent sample in this survey, they may well be a much larger proportion of the general population.

“We think it's critical for investors to understand their psychological make-up,” said Ms Grove said. “Money is an emotional instrument, but emotions can get in the way of making the right investment decisions. Behavioral scientists have tended to look at investors as a whole, but each of us—men and women alike—are influenced by different emotions. If we can fathom our individual emotional tendencies, then we can take steps to anticipate and correct them.”

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