Most Effective Investment Approach Combination of Male and Female Traits

Jane Young, CFP, EA

Jane Young, CFP, EA

Numerous studies have found that men and women generally approach investing differently.  Generalizations can be dangerous but there is ample evidence to indicate there are some common gender traits that may hinder our investment performance.  An increased awareness of our potential strengths and weaknesses may help us to adjust our behavior for a better outcome.

Studies have found that men are more confident than women when it comes to investing.  According to Meir Statman, professor of finance with Santa Clara University, “Women tend to be less overconfident than men.  In the stock market, where so much is random, trying to do better than average is more likely to get you results that are below average.  This really is where all the confidence is going to hurt you”.  On the positive side confidence can prompt you to make a decision and take action, but overconfidence can result in taking too much risk and investing in things you don’t know enough about.  A lack of confidence can result in taking too little risk and a reluctance to take action.

In another study conducted by Brad M. Barber, professor at UC Davis and Terrance Odean, professor at UC Berkeley, researchers found that overconfidence leads men to trade excessively.  As a result their returns suffer more than women’s.  But women and men sell securities indiscriminately;    women just do it less often, so their performance doesn’t suffer as much.

According to the 2010 study by the Boston Consulting Group, women have a tendency to focus more on long term goals.  Their investment strategy and risk tolerance revolves around long term goals and financial security.  Men have more of a business orientation and tend to be more focused on efficient transactions and short term performance.  Men are likely to be more competitive and thrill seeking in nature which can lead to a focus on short term returns.  Women’s longer time horizon may help them to prepare for retirement but if they are overly concerned with security they may not take enough risk to earn the investment returns needed to meet retirement needs.

Additionally, the Blackrock Investor Pulse Survey of 4,000 Americans found that 48% of women describe themselves as knowledgeable about saving and investing vs. 57% of men.  Women generally felt less confident making investment decisions and investing in the stock market.  Typically women were likely to do more research, take more time to make investment decisions, use more self-control and stay the course.

Studies have also indicated women enjoy learning about investments in a group setting and men are more likely to be independent learners.  Women are also more receptive to financial research and advice.

The best approach to successful investing is a blend of habits commonly practiced by both men and women.  Identify your personal biases and tendencies and make adjustments to achieve optimal investment results.

Timeless Tips for Investment Success

Jane Young, CFP, EA

Jane Young, CFP, EA

You don’t need to employ a lot of sophisticated techniques and strategies to become a successful investor.  The most effective tools for investment success are simplicity, patience, and discipline.  Below are some guidelines to help you get the most from your investments.

Invest for the long term.  Evaluate your situation, set some goals, create a plan and stick with it.   Keep money that you may need for emergencies and short term living expenses in less volatile investments such as money market accounts, CDs and bonds.   Investments in the stock market should be limited to money that isn’t needed for at least 5 years.  If you keep a long term perspective with the money invested in the stock market you will be less likely to react to short term fluctuations.

Maintain a diversified portfolio.  Your portfolio should be comprised of a variety of different types of investments including stocks, bonds and cash.  The stock portion of your portfolio should include stock mutual funds that invest in companies of different sizes, in different industries and in different geographies.  Don’t chase the latest hot asset class and don’t act on the hot stock tip your buddy shared with you at happy hour.  Create a diversified portfolio and rebalance on an annual basis.  It’s also advisable to avoid investing more than 5% in a single security.

Don’t Time the Market.  Many studies have found that market timing just does not work and can be detrimental to your portfolio.  The so-called experts really have no idea what the market is going to do.  Many analysts earn a living by projecting future market fluctuations when in reality they are no better at predicting the future than you or me.  Peter Lynch sums it up perfectly with the following quote – “More money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Keep Your Emotions in Check. The stock market is volatile and there will be years with negative returns.   Limit investment in the stock market to money you won’t need for several years.  Have patience and stay the course.  As experienced after the 2008 correction, the market will eventually rebound.  Don’t succumb to media hype and fear tactics claiming things are different this time. There have always been, and always will be, major events that trigger dramatic fluctuations in the stock market.  Don’t panic this will pass.  Sir John Templeton once said, “The four most dangerous words in investing are: “This Time is Different!”

Be tax smart but don’t let taxes drive your portfolio.  Where possible maximize the use of tax advantaged retirement vehicles such as 401k plans and Roth IRAs.  Place investments with the greatest opportunity for long term growth in tax deferred or tax free retirement accounts.   Save taxes where it makes sense but don’t intentionally sacrifice return just to save a few dollars in taxes.

Don’t Let Emotions Derail Your Investment Portfolio

Jane Young, CFP, EA

Jane Young, CFP, EA

Emotions may be the single biggest detriment to your investment success.  We try to approach investments from a logical perspective but we are emotional creatures and money can stir-up intense feelings. The most common emotions are fear and greed which can lead us to overreact and sell low when the market is down and buy high when the market is at a peak.  Both actions are harmful to the performance of your investment portfolio. We can’t ignore emotions but we can better understand our emotional triggers and learn how to manage them.

You can minimize emotional reactions to fluctuations in the stock market by creating a plan.   With some planning you can establish a diversified asset allocation that incorporates your investment timeframe, financial goals and tolerance for risk.  A well designed asset allocation can ensure that money needed in the short term is placed in safer fixed income investments while long term money is invested in higher return, higher risk investments like stock mutual funds.   As a general rule, money needed in the next five years should not be invested in the stock market.  If you position your short term money in safer, less volatile investments such as money markets, CDs and bonds, you will be less likely to overreact   and act on emotion.

When you invest in the stock market prepare yourself for volatility including some years with negative returns.  Over long periods of time, the average return in the stock market has been around 9%, much higher than the average return for fixed income investments.  However, stock market returns are not level.  In some years, stock market returns will be higher than average and some years they will be lower than average. If you are prepared for this and maintain a long time horizon you will be more likely to stay on course.

Be wary of sensational news reports that claim the world is coming to an end and everything is different this time.  The stock market goes through cycles and there will always be scandals, bubbles and crises getting blown out of proportion by the media, financial pundits or financial companies trying to sell you something.  An example of this is commercials that use fear tactics to encourage you to buy gold and silver. They prey on the fear and uncertainty investors experience during a significant market drop.

Buying on emotion can also be detrimental to the long term performance of your portfolio.  We have a natural fear of missing an opportunity.  Avoid chasing the latest hot asset class or following the crowd because you don’t want to miss out.  Assets performing well this year may be next year’s losers and investments with abnormally high returns aren’t sustainable.  Don’t get swept up in the euphoria, keep your portfolio diversified where assets that perform well this year can buffer against those that aren’t performing well.

Slow and steady wins every time!

Stock Market Investing Requires a Long Term Perspective

 

Jane Young, CFP, EA

Jane Young, CFP, EA

The recent volatility in the market has prompted some investors to question the future direction of the stock market.  Unfortunately, the stock market is impacted by so many factors that it is impossible to predict short term movements.  Over the long term, the stock market has always trended upwards but the path has been anything but smooth.   We could be on the tipping point before a major correction or at the beginning of a long bull market – we just don’t know. 

As a result of this uncertainty, it is impossible to effectively time the market.  Not only do you need to accurately predict when to sell but you also need to know when to re-enter the market.  Even if you select the right time to sell, there is a good chance you will be out of the market when it makes its next big move.  

To compound this issue, decisions to buy and sell are frequently driven by short term emotional reactions.   The fear of losing money can trigger us to make a sudden decision to sell, or the fear of missing an opportunity can cause a knee jerk reaction to buy.  We need to resist these very normal emotional reactions and maintain a long term focus.  The stock market should only be used for long term investing.  If you don’t need your money for at least five to ten years you are more likely to stay invested and ride out fluctuations in the market. 

If you lose your long term perspective, and react to short term emotional reactions, you can get caught up in a very detrimental cycle of buying high and selling low.  An example of a common cycle of market emotions begins when the market drops and you start getting nervous.   Over time you become increasingly fearful of losing money and end up selling your stock investments after the market has dropped considerably.   Then you sit on the sidelines for a while, waiting for the market to stabilize.  The market starts to rebound and you decide to jump back in after that market has gone back up.  Afraid of missing a great opportunity, you buy at the market peak.   This is a self-perpetuating cycle that can be very harmful to your long term investment returns.

To avoid the temptation to time the market and react to emotional triggers, keep a long term perspective.   Focus on what you can control.  Maintain a well-diversified portfolio that is in line with your long term goals and your investment risk tolerance.  Live within your means and maintain an emergency fund of at least four months of expenses.  Invest money that you will need in the short term into safer interest earning investments.   By limiting your stock market investments to long term money, you will be more likely to stay the course and meet your investment goals.

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