Some of the same strengths that many women bring to executive positions --- patience, discipline and a willingness to listen and do the research --- may make them better investors than men.
Thatís a conclusion that can be drawn from a groundbreaking study, ìBoys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,î by University of California researchers Brad Barber and Terrance Odean.
Men, overconfident in their stock-picking abilities, traded 45 percent more than women, according to the 2001 study published in The Quarterly Journal of Economics. But rather than boosting performance, men hurt their rate of return with the excessive trading, by nearly a full percentage point.
Overconfident people, as defined by the study, tend to overestimate the precision of their knowledge about a subject, particularly a subject that is difficult and hard to predict. Or, in other words, these may be people who lack the patience, discipline or willingness to listen and do the research to get the right results.
The study, based on an analysis of six yearsí worth of discount brokerage data for more than 35,000 households, also found that single men hurt their returns more than married men, through even more excessive trading. As a result, single men lagged single womenís returns by nearly 1-1/2 percentage points. (These findings actually lead the researchers to hypothesize that being married may help reduce menís overconfidence, at least when it comes to investment decisions.)
This isnít the first study to look at possible gender differences and overconfidence when it comes to financial matters. A series of Gallup surveys conducted for PaineWebber found that while both men and women tend to think their own portfolios would outperform the market, men expected to outperform the market by a wider margin, nearly 3 percent, compared with women's expectation of outperforming by about 2 percent.
While these studies of gender differences havenít specifically drawn comparisons between what makes a strong investor and what makes a strong executive, it stands to reason that patience, discipline and a willingness to listen and do the research are important qualities to bring to both endeavors.
You already know the advantages these qualities bring to your business leadership positions. Hereís how these characteristics can also benefit you in your personal finances.
Patience. Despite the current bear market and double-digit drops in the stock market, history shows being a long-term investor does have its rewards. In fact, the longer your holding period, the more likely youíll ride out the tough times, and the more likely youíll have a decent average annual return. Long-term isnít just one or two or three years, but seven to 10 years or longer. When youíre talking about funding retirement or other long-term goals, patience in investing is a definite virtue. Of course, youíll want to make sure you have the right set of investments and a well-diversified strategy to begin with, so that the patience will pay off.
Discipline. In many ways, discipline is the key to successful investing, for both building wealth and preserving it. Getting into the markets in a regular, disciplined way, through a strategy known as dollar-cost averaging, allows you to build wealth over time by buying more shares when theyíre low and fewer shares when theyíre high. Setting aside a certain dollar amount out of your paycheck every week for a 401(k) plan is an example of dollar-cost averaging. To preserve wealth youíve already accumulated, the key form of discipline to practice is portfolio rebalancing. Every year or so, trim back the winners in your portfolio to fund the underperformers, so that your portfolio continues to follow your original asset allocation strategy. Without such disciplined rebalancing, itís too easy to get swept up in the emotions of riding the winners for too long, and seeing much of your profit disappear, as happened with so many investors who stayed aboard the tech stock bandwagon even as it crashed. Youíll want to be careful in how you rebalance your portfolio, however, to minimize trading costs and taxes.
Listen and do the research. Doing your homework, while steering clear of ìanalysis paralysis,î is as important to investment decisions as it is to executive decisions. Womenís willingness to take the time to do the research may help explain the growing popularity of all-women investment clubs. With the wealth of personal finance information now available on the Internet, in print, on television and on the radio, doing your homework is easier than ever. But if you donít have the time to do your own research, be sure to hire the right expertise to get you on track. And donít be afraid to ask the adviser about fees, compensation structure and investment philosophy, among other questions you would ask in coming to any kind of business decision.
Finally, the most important personal finance lesson of them all may be: Donít be overconfident, but donít lack confidence either.
Approach your personal finance decisions the same way you would a business decision. Do enough homework, surround yourself with good people, ask the right questions, have the right amount of patience and discipline, to be confident in your conclusion. The same skills you need to run a business apply to managing your finances.
And with women living longer, earning less and having fewer retirement resources than men on average, taking charge of your own finances is as important as any executive decision you might make.
Remember the old stereotype about men refusing to stop and ask for directions when lost? Perhaps women make better investors because we know when to ask the right questions.