Portfolio Envy – Size Does Matter

Posted on July 6, 2012 at 12:30 PM PDT by

While Freud’s 1908 theory of penis envy has been wrought with controversy, financial sciences have clearly demonstrated that when it comes to money management, most men should have a serious case of portfolio envy. As some men like to take pride in bringing home the bacon, this realization could be quite emasculating. But the facts are in — research by economists Dr. Terrance Odean and Dr. Brad Barber has revealed that women’s risk-adjusted returns outpaced that of men by 1% annually. Additionally, a past National Association of Investors Corporation study corroborates this finding and even suggests a wider gender gap with women outperforming men by a whopping 1.4% annually.

Minimizing Risk

One of the difficulties male investors face is the testosterone factor — an innate urge to beat the other guy, and then, of course, brag about it. This may explain why men trade in their accounts 45% more than women. While many men may feel that getting all worked up over a little bit of risk is being a sissy, research shows that sober risk analysis is essential to constructing a well-diversified portfolio and achieving long-term performance.

Minimizing risk, for whatever reason, doesn’t seem to come naturally for men. A recent New York City Department of Transportation study revealed that men are 40% more likely to speed through a yellow light than women. More tragically, a 2007 TrafficSTATS report revealed that men have a 77% higher risk of dying in a car accident.

Men can be found running red lights in other areas of life as well. A study by anthropologist Kate Fox revealed that women view gambling negatively, while men hold a slightly positive view. The study goes on to state that women are more likely to avoid smoking, wear a seat belt, and even brush their teeth.

Men’s willingness to take risk in an effort to beat the market, however, is sadly misplaced. Academic research reveals that a mere one out of three professional managers beat their benchmark over five years, with the odds dramatically decreasing over a 10-year time span. Women seem more able to grasp this reality, and invest accordingly, by taking a longer-term approach.

A wee bit impatient

During the financial collapse of 2008, one nationwide survey revealed that one in eight men — as opposed to one in 40 women — made trades during the collapse in an effort to reevaluate, change paths and find a new strategy for future growth. Such switches in investment approach were also confirmed in Fox’s research revealing that women are more patient and less impulsive with their investing. Women’s reticence results in a less active investment approach with fewer transaction fees, lower tax friction, and, as the science confirms, better returns.

Why ask for directions?

Most everyone seems to have a tale of a male driver being lost and unwilling to stop and ask for directions. Whether myth or fact, Fox’s research revealed that when it comes to finances, women are more apt to admit ignorance and reach out for help. While both men and women lacked knowledge when it came to certain financial products, women had a higher likelihood to ask for more information and clarification. More facts resulted in better investment decision and performance.

By stepping out of the testosterone-laden sandbox of active money management and resisting the impulse to compete to win, men can take a page out of the playbook of their gender counterparts. Simple global diversification, low-cost and tax-efficient indexing, and staying committed to maintaining allocations over the long haul are great building blocks for retiring with a bigger portfolio. And yes, when it comes to your retirement account, it turns out that size does matter.