Five Things You Need To Know About Investing
Have you ever stopped to wonder whether men are really any better at investing than women?
A new study by the fund management company, Fidelity, shows that over a ten-year period, its female customers earned, on average, 0.4% more per year than their male counterparts. That may not seem like a big deal, but when that figure is compounded over a few decades, it can add up to a huge difference.
A recent study by Forbes showed 23% men are investing in the stock market more since Covid-19 compared to only 10% of women, and that women tend to be more cautious. SCM Direct, which has 39% female clients (higher than many competitors), has found that their female investors tend to be more long-term, willing to diversity and are more open to balancing costs, risk and returns, rather than just being obsessed with performance.
There is plenty of academic evidence suggesting that women make better investors than men. The main reason as to why is simple: women trade less than men do. That’s right: the more you do (the more you buy and sell and the more you chop and change your investment portfolio) the worse your returns can be.
Boys Will Be Boys
In a paper called ‘Boys Will Be Boys’, professors Brad Barber and Terrance Odean found that although women trade more than they should, men trade even more frequently. Between 1991 and 1997, they found that this increased trading reduced men’s net returns by 2.65% per year, compared to a hit of 1.72% for women.
Why men trade more than women is open to debate. Men are more prone to overconfidence, for a start, and then there’s testosterone, which according to the neurologist-turned-investment author William Bernstein, reduces fear and increases greed. “(Testosterone) does wonderful things for muscle mass and reflex time,” says Bernstein, “but doesn’t do much for judgment.” Therefore, in large part, investment success is down to behaviour, and this is where women have the edge.
“Ah,” some women may be thinking “that’s all very well, but I don’t know anything about investing. My partner understands it far better than I do”. Well, we have some good news. To quote Bernstein again, “the body of knowledge that the individual investor, or even the professional, needs to master is pitifully small.”
Here, in a nutshell, is everything that you should know about investing – male or female.
- Share prices are fair
Every day we happily pay the market price for all sorts of goods and services. But many of us see the stock market differently. We assume, for example, that shares are either undervalued or overvalued. But academic research has consistently shown that markets are actually very efficient. It’s all down to what statisticians call ‘the wisdom of the crowd’.
There are millions of trades made every hour, and each one represents the very latest estimate of the entire market as to how much an asset is worth. Of course, prices change all the time. But it’s unexpected news that causes them to rise and fall. And, by definition, the unexpected is impossible to predict. Also, markets react to new information in milliseconds. So, by the time you’ve processed the news yourself – it’s probably too late – the new information is already reflected in the price.
- Timing the market is very hard
Switch on the financial news on your TV, or read the money section of any newspaper, and you’ll see there are plenty of self-proclaimed experts giving their opinion as to what investors should do. Yet the track record of these market gurus is dismal. Year after year, their forecasts are inaccurate. Markets are bound to rise and fall sharply from time to time, and everything seems so obvious in hindsight.
But consistently picking the right time to get in and out of the market is an impossible task. “But”, you might be thinking, “what about those ‘star’ fund managers who can outperform the market? Can’t I find one of those to manage my money for me?”. Unfortunately, only a tiny proportion of fund managers beat the market in the long run and spotting the winners in advance is extremely difficult to do.
- Cost is very important
The fund industry and the media like to make investing seem exciting. They typically focus on performance — the possibility of striking lucky and earning big returns. In fact, investors should be more concerned with a more mundane issue – cost. Studies have shown that, over time, cost is the single biggest predictor of investment returns. Generally speaking, the more you pay to invest, the smaller your net returns will be.
Because of the effects of compounding — charges on top of charges, year after year — it’s not uncommon for fees and charges to swallow up one third or more of an investor’s potential returns. Thankfully, although you have no control over how your fund performs you can control the fees and charges you pay. The best way to keep the cost down is to use passively managed index funds or ETFs, which simply track an index at a fraction of the cost of actively managed funds.
- Diversification is essential
It’s common sense not to put all your eggs in one basket, but you’d be amazed at how many investors forget. Just as a healthy diet means eating a range of different foods, a healthy portfolio should include several different assets. The main reason for diversifying is to avoid the risk of being too heavily concentrated in one particular stock, sector, country or asset class.
Another reason is to reduce volatility. Historically, equities have produced higher returns than bonds or cash. But in the short term, share prices can be very volatile. So, holding government bonds in your portfolio, alongside equities, can smooth the ride to your investment goals. In short, having a broadly diversified portfolio removes the need for guesswork — saving you time, money and unnecessary anxiety.
- Your biggest problem is you
Of course there are good years and bad years for global markets, but in the long term it pays to stay invested. Market returns are, in fact, fairly generous. The problem is investors very rarely receive the market return simply because they aren’t sufficiently disciplined. In other words, your number one problem as an investor is you!
Human beings have been conditioned to act on impulse. Markets soar and greed takes over as we rush to buy. When they plummet, fear kicks in and we’re overwhelmed by an urge to sell. More often than not, we buy and sell at just the wrong time. In reality, we would be much better off keeping a cool head and, almost invariably, leaving our portfolios exactly as they are.
And that’s it!
There’s plenty more we could tell you about investing, and in the resources section you’ll find some books we recommend that you read. But, if you endeavour to understand these five key things, that, should help you achieve success in your investment journey. Investing isn’t rocket science and it certainly shouldn’t be labelled a ‘man thing’, so get fired about your finances and look after your financial health today – your future self is worth it! .
Mr Powell
https://www.evidenceinvestor.com/home-uk/
[3] http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/boyswillbeboys.pdf
Capital at Risk.
The value of investments can go down in value as well as up, so you could get back less than you invest.
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