Equality between the sexes has been hard-won, but there still appear to be some key differences when it comes to investment risk.
There is a long-running view – supported by science – that women are disinclined to take risk with their savings, while men are prone to taking too much.
There are a number of factors at work. The first is that investment losses appear to affect women more severely than men.
A study in the British Journal of Psychology found that loss aversion accounts for more than half of the lower risk taking from women. In general, men are more optimistic about their finances and about future outcomes, though it is difficult to know whether this bullish optimism is biological, or simply that they tend to have more money.
Certainly, it chimes with research from Fidelity that found 32% of women cited ‘fear of risk’ as a barrier to investing, compared with just 23% of men. In general, they need to know more before they invest, whereas men are more confident about their investing ability. Sound familiar?
Is it all biology?
This confidence also leads to problems. In 2008, a study of UK traders by John Coates, from the Judge Business School at Cambridge University, and Professor Joe Herbert, a neuroscientist, found a positive feedback loop between winning, testosterone, greater confidence and risk taking.
The problem was when testosterone levels got too high, it led to irrational risk taking and excessive losses.
For long-term investors, this irrational risk taking is a problem and may be why, in another survey by Fidelity, women investors were found to outperform men by 0.4% annually.
They may miss out on sharp rises in certain segments in the market, but they will also miss out on the bursting of the bubble. Admittedly, the same study showed that women held too much cash on the sidelines, but that has not acted as much of a drag as interest rates have risen.
Situation versus biology
Testosterone aside, it is often difficult to disaggregate whether women take less risk because they have less money and are therefore less able to take investment risk, or whether it is hard-wired.
Women tend to have fewer savings, and therefore don’t always have the capacity to take the same amount of risk as men.
Among more experienced investors, for example, the differences start to evaporate.
A look at the women among FundCalibre’s Elite Rated managers shows that of the 13 funds, the average risk rating is 7.2, compared with an average of 6.8 for the male fund managers.
This is slightly skewed by the fact that all but one of the women are equity managers. The only bond manager – M&G’s Claudia Calich – manages an emerging market debt fund (M&G Emerging Markets Bond), which tends to be at the higher risk end of the bond spectrum.
The female fund managers are also spread across a range of sectors – four are in the global sector, three are in the UK All Companies sector and the remainder are spread across Japan, North America, Asia Pacific, UK Equity Income and Specialist.
Notably, only one investment trust manager in Sue Noffke, manager of the Schroder Income Growth investment trust features on the list. Similarly six of the 13 funds led by female managers were part of our Elite Radar watchlist, including Redwheel Biodiversity, abrdn Global Smaller Companies and Artemis Leading Consumer Brands.
Equally, while it is anecdotal, I am the least risk-averse member of the Chelsea team.
For me, this is rational, rather than reflective of any great optimism on financial outcomes. Smaller companies, for example, have a long track record of outperformance and therefore it makes sense to have a strong weighting there.
It can be difficult to hold my nerve during periods like the one we’ve just seen, but I recognise that this is just the swings and roundabouts of financial markets.
Does it matter?
In theory, higher risk should equate to higher reward over the long-term. Holding too much in cash can leave an investment portfolio vulnerable to inflation, or it may not grow fast enough for an investor to achieve their long-term investment goals – like a comfortable retirement.
So, women’s risk aversion could be a problem. Women retire with pension pots of around 33% of the level of men’s, and they tend to live longer. Not taking enough investment risk is a threat to their standard of living in later life.
That said, it is also worth noting that financial markets have been in a peculiar phase and have only rewarded very specific types of risks – i.e. taking a great big punt on the US technology sector.
If the stereotypes are to be believed, this is unlikely to have suited either side – it’s too conventional for men, and it’s too punchy for women. 2023 may not have been a good year for either side.
In the end, both women and men need to curb their natural instincts a little to be good investors.
Men need to learn not to bet it all on Bitcoin, but rather to observe the usual investment rules – diversification, regular savings and so on.
Women need to recognise there are risks inherent in not taking enough risk, and – in particular – holding too much in cash. For both sides, this comes with experience, and is probably why the differences start to evaporate for professional investors.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
