Women investors often outperform men, and here’s the simple reason why | Smart Change: Personal Finances

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Over the past few decades, a curious statistic has kept popping up in various studies all over the world. It seems that women tend to generate a consistently higher rate of return than men when it comes to investing.

This was first reported by a research team from the University of California, Berkeley. The research found that, out of 35,000 brokerage accounts observed over six years, female investors outperformed male investors by more than a percentage point.

As if a sample population of this size weren’t enough, several other research projects have reported similar results, most recently Fidelity. He revealed that out of a group of 5 million Fidelity customers, women outperformed men by nearly half a percentage point over a 10-year period.

These percentages may not seem like a substantial outperformance, but over decades the result can add up to tens of thousands more dollars in your account.

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The reason for the outperformance

Vanguard 2022 How America Saves The report highlights the disparity by explaining that women tend to trade 50% less than men. In other words, men move in and out of positions at a 50% higher rate than women.

This may not be the only reason for the disparity in returns. But the fact that men are trading stocks at a much higher rate must be one of the main drivers.

Why overtrading hurts your portfolio

Investing is a unique discipline in that the more you “do stuff”, the worse your performance tends to be.

The late Vanguard Group founder Jack Bogle talked about the harm that trading does to returns in his book The clash of cultures: investment versus speculationwhere he attributes it to the underperformance of mutual funds: “In the mutual fund industry, for example, the annual portfolio turnover rate of an average actively managed equity fund is close to 100 %, ranging from a low of 25% for the lowest revenue quintile to an astonishing 230% for the highest quintile.”

A 100% portfolio turnover means that the portfolio is completely different from one year to the next. If the goal is to own large companies for long periods of time, it’s no wonder mutual funds have underperformed with astronomically high turnover rates.

Trading Disables Your Biggest Advantage

The main reason to trade minimally is that the more you trade, the less your portfolio will compound. Compound interest works in favor of patient investors because it starts slowly but snowballs over long periods.

Even the greatest investor of our time, Warren Buffett, earned 99% of his wealth after his 50th birthday, demonstrating how incredibly powerful compound interest is if you are patient enough to experience it.

Unfortunately, many investors are more interested in chasing the next sector or stock they think will explode in the short term than in owning high-quality companies for the long term.

Bogle took this to heart as he pioneered low-loss, low-revenue solutions index funds and have frequently made statements like this: “Every piece of data ever produced indicates that trading is the enemy of the investor. The more you trade, the less you earn.”

Conclusion: Invest like a woman

I’m sure there are deeper psychological or behavioral conclusions we could draw from the gender disparity in investment returns, but for us fools the message that’s screaming at us is to think long and hard before tinkering with our wallets.

If there is an inverse relationship between trading and portfolio performance, we should all strive to invest more like women do. And unlike many things in life, thankfully, that means doing a lot less instead of more.

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Robert D. Coleman