For the last several decades, a curious statistic has kept popping up in various studies all over the world. It seems 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 at Berkeley. The research found that, out of 35,000 brokerage accounts observed over six years, the female investors outperformed the males by over a percentage point.
As if a sample population of that size wasn’t enough, several other research projects have reported similar findings, most recently Fidelity. It found that out of a group of 5 million Fidelity customers, women outperformed men by nearly half a percentage point over a 10-year period.
Those percentages might not sound like a substantial outperformance, but over decades, the result can be tens of thousands of extra dollars in your account.
The reason behind the outperformance
Vanguard’s 2022 How America Saves report sheds light on the disparity by explaining that women tend to trade 50% less than men. In other words, men are moving in and out of positions at a 50% higher rate than women.
That might not be the only reason behind the disparity in returns. But the fact that men are trading stocks at a much higher rate has to be one of the main drivers.
Why overtrading hurts your portfolio
Investing is a unique discipline in that the more you “do things,” the worse your performance tends to be.
The late founder of the Vanguard Group, Jack Bogle, talked about the harm trading does to returns in his book The Clash of the Cultures: Investment vs. Speculation, where he attributes it to mutual fund underperformance: “In the mutual fund industry, for example, the annual rate of portfolio turnover for the average actively managed equity fund runs to almost 100%, ranging from a hardly minimal 25% for the lowest turnover quintile to an astonishing 230% for the highest quintile.”
100% portfolio turnover means the portfolio looks entirely different from one year to the next. If the goal is to own great businesses for long periods of time, it’s no wonder mutual funds have underperformed with astronomically high turnover rates.
Trading deactivates your greatest advantage
The biggest reason to trade minimally is because the more you trade, the less compounding your portfolio will experience. Compound interest works in favor of patient investors because it starts slowly but snowballs over long periods of time.
Even the greatest investor of our time, Warren Buffett, earned 99% of his wealth after his 50th birthday, which demonstrates how incredibly powerful compound interest is if you’re patient enough to experience it.
Unfortunately, many investors are more interested in chasing the next sector or stock they think will blow up in the near term than in holding high-quality companies for the long term.
Bogle took this to heart as he pioneered low-loss, low-turnover index funds and frequently made statements like this: “Every piece of data that’s ever been produced says that trading is the investor’s enemy. The more you trade, the less you make.”
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 is screaming at us is to think long and hard before tinkering with our portfolios.
If there is an inversely proportional relationship between trading and portfolio performance, then we should all strive to invest more like women do. And unlike many things in life, fortunately that means doing significantly less instead of more.
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