It has become accepted investment wisdom that women tend to be more risk-averse than men. That, of course, is no bad thing in itself but, according to Franco-American investor, author and commentator Dominique Mielle, who recently joined us as our guest on The Value Perspective podcast, the reality is rather more nuanced and a great deal more interesting.
“There is certainly research that shows women tend to be more risk-averse,” she acknowledges. “But what the research also shows – which is usually ignored or, if I am being very charitable, not understood by people in investment – is that, on a risk-adjusted return basis, women actually perform better. In other words, women may be more risk-averse but they take better proportionate risk relative to the return.
“I have found three different studies that show that and the biggest reason why men tend to underperform is because they overly seek risk and they overtrade – and by overtrading, they reduce their returns by the friction costs. So men tend to be overconfident investors and then they trade to the point of reducing their risk-adjusted return on a net basis.
“And that is very important because, I think you would agree, taking a risk merely for the sake of it makes no sense for investors, right? What you want to do is take a risk that is proportionate to the return – and in that regard women are just as good as men. What that does mean, however is maybe a female investor will have a bit of a different style from a male investor.
“Maybe she will appear more risk-averse but then she will size more appropriately or be more patient and then the result is the net return is just as good, if not better. That is a tough argument to make but, again, there have been numerous studies – one of which, the 2021 Women and Investing Study, was published very recently by Fidelity Investments – that show exactly the same outcome.”
Investing stereotypes is a fascinating area – and arguably one not confined to gender as men can also fall foul of perceived ideals of how fund managers should sound, look and behave. Here on The Value Perspective, for example, we have long argued the importance of being willing to admit the things you do not know and such conversations can help shine a light on this. Would Mielle agree this goes wider than gender alone?
“Absolutely,” she agrees. “In fact, another of the studies I was referring to earlier – from back in 1998 – is called Boys will be Boys: Gender, Overconfidence and Common Stock Investing, which says it all! But there is this image of risk-seeking as an absolute quality in an investor, which I think is wrong and is nicely parodied by the very funny New Yorker writer Fran Lebowitz.
“She is a smoker herself and, in one article, makes the argument that, rather than admiring mountain-climbers and downhill skiers for the risks they are taking, we should be celebrating smokers who risk death every day! That is incredibly funny because, of course, the missing point is that no one admires risk simply for the sake of risk, do they?
“When you take on any risk, there has got to be a greater goal – otherwise you are effectively just smoking and trying to kill yourself and nobody is going to applaud that. And I feel like – guys, this is the same in investing. Just taking a risk does not mean you are good investor – otherwise, we would all hire smokers. You need to get a good return. You have to go where the risk is mispriced.”
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