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11-05-2011, 12:49 AM
A good long article!
May 8, 2011
How the sexes invest differently
Men and women should know their strengths and shortcomings to cut risks and boost returns
By Lorna Tan, Senior Correspondent
Much has been written on how men and women are wired differently, and the way this permeates almost every aspect of daily life.
Little wonder then that experts suggest these gender differences can surface even in the way we invest. So it is only prudent to understand and manage these differences effectively so that they do not impair our investment choices.
Mr Victor Wong, director of wealth management at Financial Alliance, said male investors tend to be more confident as they believe that they possess a better understanding of financial matters and wealth management.
This explains why men are often more decisive and aggressive when investing.
However, this overconfidence could also result in financial disasters as men are often victims of their own ego, as they may think they are always right.
Conversely, women often lack confidence and frequently seek opinions when it comes to investing. 'Women usually want more details before committing their monies and will not hesitate to dig deeper during the initial information-gathering phase,' said Mr Wong.
Men usually do not pay much attention to details and adopt a more macro view when it comes to investing.
United States fund house Franklin Templeton Investments recently conducted a global investor sentiment survey of 13,076 respondents across 12 countries in Asia, Europe and the Americas.
Besides findings on investor sentiment and the outlook, the survey also unveiled some interesting trends among 1,000 Singapore respondents aged 18 to 24:
i) More women (71 per cent) than men (64 per cent) have bank savings, fixed deposits and money market accounts.
ii) More men (64 per cent) than women (47 per cent) own stocks.
iii) More men (20 per cent) than women (11 per cent) own bonds.
iv) More men (21 per cent) than women (15 per cent) are likely to expect a stock's performance to be the best over the next 10 years.
(v) More men (54 per cent) than women (43 per cent) invest outside of the domestic market.
(vi) More men (71 per cent) than women (59 per cent) intend to invest this year.
(vii) More women (18 per cent) than men (12 per cent) are likely to expect precious metals to perform the best this year.
These findings point to a number of traits that behavioural finance experts have traditionally associated with male investors, said Mr William Tan, head of sales at Franklin Templeton Investments, Singapore.
The traits include the tendency for men to be more overconfident than women, resulting in their openness to investments perceived as more risky, such as stocks and bonds.
Mr Tan believed that this overconfidence is fuelled by a mix of optimism and an illusion of control. This can lead them to underestimate risks and be overly aggressive in their investing pattern.
To overcome this, he suggested that male investors ask to be fully apprised of potential risks of making certain investments. They should also adopt a more patient and long-term approach in evaluating their investments.
On the other hand, female investors tend to be more risk-averse and overly cautious, which might cause them to miss out on valuable opportunities and close themselves to other asset classes, or markets with potential upside.
The survey also indicated that men are willing to look for opportunities beyond the field they are familiar with, and they trade more frequently.
Mr Wong concurred with this finding and said that the average turnover of portfolios owned by male investors is usually about 25 to 50 per cent higher than those of their female counterparts.
When it comes to investing in precious metals, Franklin Templeton said the trend indicated by the survey is likely to stem from a 'familiarity bias' on the part of the females. After all, female investors would tend to be more familiar and comfortable with gold and precious metals due to their exposure to such items either in the course of shopping for their bling, or through jewellery advertisements targeted at them.
By the same token, women may be more receptive to owning shares of consumer goods firms, or luxury houses such as French luxury goods group LVMH Moet Hennessy Louis Vuitton, as they can relate to the performance of these luxury brands through their personal observation or simply by keeping abreast of buying trends.
So which of the genders usually comes out on top in the investment stakes?
Ms Yash Mishra, head of private client advisory services at ipac financial planning Singapore, said that the most extensive study was the 2001 paper by professors Brad Barber and Terrance Odean, Boys Will Be Boys: Gender, Overconfidence And Common Stock Investment.
The paper concluded that single women's portfolios exceeded those of men by 3 per cent annually. For married couples, the difference was lower but women still outperformed men by 1.4 per cent. A 2005 British study corroborated this as well, added ipac.
Mr Wong and Ms Mishra said both genders can learn from each other. Men can learn from women the importance of seeking more detailed information before investing, adopting a longer-term horizon and being more patient. After all, time in the market is better than trying to time the market. This is because those who get out to avoid downturns typically make the mistake of not knowing when to return, staying on the sidelines as markets recover.
Women can learn from men to be more decisive when making investment decisions, though only after they have gathered the relevant information. And if a female investor has a long investment horizon, she is in a more comfortable position to take on more risk, said Mr Wong.
Women should learn that by being more risk-averse and just sitting on cash, it will lead to losing out in the long run because of inflation, added Ms Mishra.
Irrespective of your gender, Mr Tan said it is always important to be aware of one's limitations and shortcomings, and not take previous investing successes or failures as an accurate indication of what the future is likely to hold.
Managing psychological factors
Besides gender-related characteristics, investors generally fall prey to certain common psychological factors when it comes to investing.
In its latest analysis report on investor behaviour, US-based research firm Dalbar sets out nine psychological factors which help to explain why investors often make poor investment decisions. Dalbar said these factors overtake rational decision-making and drive investors to do the wrong thing.
1 Loss aversion
You are affected by loss aversion when you expect to find high returns with low risk. It causes you to search for investments that do not exist and results in either taking no action or later discovering that the selected investment fails to meet your expectations. This also often results in selling the investment at the wrong time.
2 Narrow framing
This results from making decisions without considering all the implications. The outcome is quick decision making with the consequence that facts are uncovered only after inappropriate investments are made.
For instance, Mr Tan observed, many investors have been moving their savings, previously invested in fixed income, into equities, as they expect interest rates to go up.
'These 'see-saw' swings in their investment mentality - and as a result, extreme allocations - are potentially debilitating for their investment portfolios in the long run, as they can create extreme volatility and lower their returns.'
He added that one of the best risk management strategies an investor can employ is true diversification, that is, across geographical and asset classes.
3 Anchoring
Most of us tend to relate to familiar experiences and reference points but the danger is doing so even when it is inappropriate. This can mislead investors unless it is used with caution.
For example, some investors find themselves investing in firms where their stock prices have plunged in a very short amount of time. In this case, the investor could be anchoring on a recent high that the stock has hit and believes that the price dip provides an opportunity to buy the stock at a discount. But without doing proper due diligence, these investors could be ignorant that it was the changes in their underlying fundamentals that led to stock prices declining.
As such, anchoring can lead to investors selecting investments that cannot reasonably be expected to produce the expected returns.
4 Mental accounting
Investors should rationally view every dollar as identical. But when we fall prey to mental accounting, we tend to designate some of our dollars as 'safety' capital which we invest in low-risk investments, while at the same time treat our 'risk capital' quite differently. By taking undue risks in one area and avoiding rational risks in others, we might be misled into inappropriate investments.
5 Diversification
Experts typically advise investors to diversify their investments to reduce risk. But the effect is not achieved when the diversification is done from simply using different sources. Instead, it creates a false sense of protection.
Ms Mishra said a diversified portfolio means spreading your investments over and within asset classes, fund managers and industries, and not just buying a handful of funds or stocks.
'Diversification means there will be times when one part of your portfolio may be making less or negative returns than other parts.'
She added that this approach meant the investor should have have the discipline to stick to the asset allocation and not move from one asset class to the other.
Mr Tan also cautioned investors against adopting a 'home country bias', which can result in a poorly diversified portfolio that affects returns.
According to the recent global investor sentiment survey conducted by Franklin Templeton Investments, 'home country bias' is especially prevalent among older investors (33 per cent for those aged 55 and above compared with 18 per cent for those aged 18-34) when it comes to equity investments.
'This could be due to historic reasons, which make them less familiar with overseas markets or investments due to the lack of exposure and opportunities available to them when they were younger,' said Mr Tan.
On a positive note, the same survey indicated that three in four Singapore respondents - significantly higher than the rest of the countries surveyed - plan to invest globally over the next decade compared to fewer than half who currently do so.
6 Herding
We become victims of a herd mentality when we allow ourselves to be influenced by our peers to follow market trends in our investment decisions. This copying of the behaviour of others even in the face of unfavourable outcomes is not desirable. Investors who go along with the crowd simply because there is a crowd tend to avoid catastrophic errors but seldom achieve above average results, said Dalbar.
Mr Wong said herding is a common mistake among investors as we often hear about the chase after the next hot stock or investment trend. To avoid it, do your homework before sinking your money into the investment.
7 Regret
Investors tend to treat errors of commission more seriously than errors of omission. Dalbar suggested that investors also make poor investment choices through inaction or reversals.
8 Media response
Investors have a tendency to react to news without reasonable examination, leading to poor investment decisions. Not all media use very thorough authentication which can make their news unreliable.
Mr Wong said the proliferation of round-the-clock news adds a lot of noise which causes investors to be reactive.
One way to counter this is to review your investment portfolio on a half-yearly basis. Do it too frequently and you may be emotionally disturbed by the fluctuation, he added.
9 Optimism
This is a belief that bad things happen only to others. This optimism results in investors holding on to poor investments even after it becomes evident that it will be difficult to recover the losses.
Adopting a long-term view
Besides the importance of understanding and managing our personal investing bias, experts extol the advantages of taking a long-term investing view.
Said Mr Tan: 'If you take a long-term view of the world and the markets, you are likely to make less emotional decisions and thus less costly mistakes, see beyond the short-term volatility of the market, and see broader patterns of market, political and economic behaviour that may not be evident to a short- term observer.'
lorna@sph.com.sg
May 8, 2011
How the sexes invest differently
Men and women should know their strengths and shortcomings to cut risks and boost returns
By Lorna Tan, Senior Correspondent
Much has been written on how men and women are wired differently, and the way this permeates almost every aspect of daily life.
Little wonder then that experts suggest these gender differences can surface even in the way we invest. So it is only prudent to understand and manage these differences effectively so that they do not impair our investment choices.
Mr Victor Wong, director of wealth management at Financial Alliance, said male investors tend to be more confident as they believe that they possess a better understanding of financial matters and wealth management.
This explains why men are often more decisive and aggressive when investing.
However, this overconfidence could also result in financial disasters as men are often victims of their own ego, as they may think they are always right.
Conversely, women often lack confidence and frequently seek opinions when it comes to investing. 'Women usually want more details before committing their monies and will not hesitate to dig deeper during the initial information-gathering phase,' said Mr Wong.
Men usually do not pay much attention to details and adopt a more macro view when it comes to investing.
United States fund house Franklin Templeton Investments recently conducted a global investor sentiment survey of 13,076 respondents across 12 countries in Asia, Europe and the Americas.
Besides findings on investor sentiment and the outlook, the survey also unveiled some interesting trends among 1,000 Singapore respondents aged 18 to 24:
i) More women (71 per cent) than men (64 per cent) have bank savings, fixed deposits and money market accounts.
ii) More men (64 per cent) than women (47 per cent) own stocks.
iii) More men (20 per cent) than women (11 per cent) own bonds.
iv) More men (21 per cent) than women (15 per cent) are likely to expect a stock's performance to be the best over the next 10 years.
(v) More men (54 per cent) than women (43 per cent) invest outside of the domestic market.
(vi) More men (71 per cent) than women (59 per cent) intend to invest this year.
(vii) More women (18 per cent) than men (12 per cent) are likely to expect precious metals to perform the best this year.
These findings point to a number of traits that behavioural finance experts have traditionally associated with male investors, said Mr William Tan, head of sales at Franklin Templeton Investments, Singapore.
The traits include the tendency for men to be more overconfident than women, resulting in their openness to investments perceived as more risky, such as stocks and bonds.
Mr Tan believed that this overconfidence is fuelled by a mix of optimism and an illusion of control. This can lead them to underestimate risks and be overly aggressive in their investing pattern.
To overcome this, he suggested that male investors ask to be fully apprised of potential risks of making certain investments. They should also adopt a more patient and long-term approach in evaluating their investments.
On the other hand, female investors tend to be more risk-averse and overly cautious, which might cause them to miss out on valuable opportunities and close themselves to other asset classes, or markets with potential upside.
The survey also indicated that men are willing to look for opportunities beyond the field they are familiar with, and they trade more frequently.
Mr Wong concurred with this finding and said that the average turnover of portfolios owned by male investors is usually about 25 to 50 per cent higher than those of their female counterparts.
When it comes to investing in precious metals, Franklin Templeton said the trend indicated by the survey is likely to stem from a 'familiarity bias' on the part of the females. After all, female investors would tend to be more familiar and comfortable with gold and precious metals due to their exposure to such items either in the course of shopping for their bling, or through jewellery advertisements targeted at them.
By the same token, women may be more receptive to owning shares of consumer goods firms, or luxury houses such as French luxury goods group LVMH Moet Hennessy Louis Vuitton, as they can relate to the performance of these luxury brands through their personal observation or simply by keeping abreast of buying trends.
So which of the genders usually comes out on top in the investment stakes?
Ms Yash Mishra, head of private client advisory services at ipac financial planning Singapore, said that the most extensive study was the 2001 paper by professors Brad Barber and Terrance Odean, Boys Will Be Boys: Gender, Overconfidence And Common Stock Investment.
The paper concluded that single women's portfolios exceeded those of men by 3 per cent annually. For married couples, the difference was lower but women still outperformed men by 1.4 per cent. A 2005 British study corroborated this as well, added ipac.
Mr Wong and Ms Mishra said both genders can learn from each other. Men can learn from women the importance of seeking more detailed information before investing, adopting a longer-term horizon and being more patient. After all, time in the market is better than trying to time the market. This is because those who get out to avoid downturns typically make the mistake of not knowing when to return, staying on the sidelines as markets recover.
Women can learn from men to be more decisive when making investment decisions, though only after they have gathered the relevant information. And if a female investor has a long investment horizon, she is in a more comfortable position to take on more risk, said Mr Wong.
Women should learn that by being more risk-averse and just sitting on cash, it will lead to losing out in the long run because of inflation, added Ms Mishra.
Irrespective of your gender, Mr Tan said it is always important to be aware of one's limitations and shortcomings, and not take previous investing successes or failures as an accurate indication of what the future is likely to hold.
Managing psychological factors
Besides gender-related characteristics, investors generally fall prey to certain common psychological factors when it comes to investing.
In its latest analysis report on investor behaviour, US-based research firm Dalbar sets out nine psychological factors which help to explain why investors often make poor investment decisions. Dalbar said these factors overtake rational decision-making and drive investors to do the wrong thing.
1 Loss aversion
You are affected by loss aversion when you expect to find high returns with low risk. It causes you to search for investments that do not exist and results in either taking no action or later discovering that the selected investment fails to meet your expectations. This also often results in selling the investment at the wrong time.
2 Narrow framing
This results from making decisions without considering all the implications. The outcome is quick decision making with the consequence that facts are uncovered only after inappropriate investments are made.
For instance, Mr Tan observed, many investors have been moving their savings, previously invested in fixed income, into equities, as they expect interest rates to go up.
'These 'see-saw' swings in their investment mentality - and as a result, extreme allocations - are potentially debilitating for their investment portfolios in the long run, as they can create extreme volatility and lower their returns.'
He added that one of the best risk management strategies an investor can employ is true diversification, that is, across geographical and asset classes.
3 Anchoring
Most of us tend to relate to familiar experiences and reference points but the danger is doing so even when it is inappropriate. This can mislead investors unless it is used with caution.
For example, some investors find themselves investing in firms where their stock prices have plunged in a very short amount of time. In this case, the investor could be anchoring on a recent high that the stock has hit and believes that the price dip provides an opportunity to buy the stock at a discount. But without doing proper due diligence, these investors could be ignorant that it was the changes in their underlying fundamentals that led to stock prices declining.
As such, anchoring can lead to investors selecting investments that cannot reasonably be expected to produce the expected returns.
4 Mental accounting
Investors should rationally view every dollar as identical. But when we fall prey to mental accounting, we tend to designate some of our dollars as 'safety' capital which we invest in low-risk investments, while at the same time treat our 'risk capital' quite differently. By taking undue risks in one area and avoiding rational risks in others, we might be misled into inappropriate investments.
5 Diversification
Experts typically advise investors to diversify their investments to reduce risk. But the effect is not achieved when the diversification is done from simply using different sources. Instead, it creates a false sense of protection.
Ms Mishra said a diversified portfolio means spreading your investments over and within asset classes, fund managers and industries, and not just buying a handful of funds or stocks.
'Diversification means there will be times when one part of your portfolio may be making less or negative returns than other parts.'
She added that this approach meant the investor should have have the discipline to stick to the asset allocation and not move from one asset class to the other.
Mr Tan also cautioned investors against adopting a 'home country bias', which can result in a poorly diversified portfolio that affects returns.
According to the recent global investor sentiment survey conducted by Franklin Templeton Investments, 'home country bias' is especially prevalent among older investors (33 per cent for those aged 55 and above compared with 18 per cent for those aged 18-34) when it comes to equity investments.
'This could be due to historic reasons, which make them less familiar with overseas markets or investments due to the lack of exposure and opportunities available to them when they were younger,' said Mr Tan.
On a positive note, the same survey indicated that three in four Singapore respondents - significantly higher than the rest of the countries surveyed - plan to invest globally over the next decade compared to fewer than half who currently do so.
6 Herding
We become victims of a herd mentality when we allow ourselves to be influenced by our peers to follow market trends in our investment decisions. This copying of the behaviour of others even in the face of unfavourable outcomes is not desirable. Investors who go along with the crowd simply because there is a crowd tend to avoid catastrophic errors but seldom achieve above average results, said Dalbar.
Mr Wong said herding is a common mistake among investors as we often hear about the chase after the next hot stock or investment trend. To avoid it, do your homework before sinking your money into the investment.
7 Regret
Investors tend to treat errors of commission more seriously than errors of omission. Dalbar suggested that investors also make poor investment choices through inaction or reversals.
8 Media response
Investors have a tendency to react to news without reasonable examination, leading to poor investment decisions. Not all media use very thorough authentication which can make their news unreliable.
Mr Wong said the proliferation of round-the-clock news adds a lot of noise which causes investors to be reactive.
One way to counter this is to review your investment portfolio on a half-yearly basis. Do it too frequently and you may be emotionally disturbed by the fluctuation, he added.
9 Optimism
This is a belief that bad things happen only to others. This optimism results in investors holding on to poor investments even after it becomes evident that it will be difficult to recover the losses.
Adopting a long-term view
Besides the importance of understanding and managing our personal investing bias, experts extol the advantages of taking a long-term investing view.
Said Mr Tan: 'If you take a long-term view of the world and the markets, you are likely to make less emotional decisions and thus less costly mistakes, see beyond the short-term volatility of the market, and see broader patterns of market, political and economic behaviour that may not be evident to a short- term observer.'
lorna@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/