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Why You Should Invest Like Your Significant Other

Tom Drake It’s the differences between men and women that make life interesting, and when you have a significant other that complements you -- even if he or she is a little different -- you have the chance to learn something new and become a better person.

The differences that attract you to your partner, and that have the potential to help you become a better person, also apply to investing. As you consider your life partner, you should also consider what could be learned from the way she or he invests. By looking at how you’re different, it might be possible to create a long-term investing plan that combines the best of both worlds.

Men, women, and investing

Recent years have seen a rash of studies about the investing differences between women and men. A study performed at the University of California, Davis followed women and men for seven years. At the end of the study, it was discovered that a single woman had better investing results than a single man (by 2.3 per cent), and that a cohort of women did better than a cohort of men (by 4.6 per cent).

One of the main reasons given for this difference is that men trade investments more often than women do. According to the study’s authors, men traded 45 per cent more than women did, and that made a big difference. They were more likely to sell low, and they also lost money due to transaction costs.

But why are men more likely than women to trade frequently? Some of it has to do with overconfidence and testosterone. According the book The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust by John Coates, testosterone levels go up during a bull market. These testosterone levels lead to confidence, and a willingness to take risks. Physiologically, we know that men produce more testosterone than women. As a result, men are often more willing to take risks. They get caught up in a bull market, and are willing to invest in assets -- without doing their homework.

This same impulsivity, though, can lead to snap decisions to sell at market lows. Vanguard examined investing behaviours of men and women during the 2008/2009 stock market drop and discovered that men often sold at the lows, locking in their losses. Women, on the other hand, were reluctant to sell just because the market was dropping. They were more likely to still have their positions intact when the market recovery began, and benefit from the increases in the years that followed. Many men had to buy back in as prices rose.

Because women are, in general, more cautious, their investments tend to benefit them more in the long run. They are more interested in finding something simple and relatively “safe” that works and sticking with it, rather than trying to find the next “winning” strategy. Part of that caution comes from a lack of confidence in themselves, especially when it comes to investing. In 2010, Prudential released a report indicating that women investors didn’t feel confident about their decisions. This leads them to choose more conservative investments, like bonds and cash, as well as encourage them to do a lot of research before making a decision. As a result, they don’t get caught up in the excitement of a bull market. They don’t make decisions that will cost them as much later, when the inevitable crash comes.

Women do face risks when they are too conservative about their investments, however. The most risk-averse women end up putting most of their money in savings accounts or bonds, and they run the risk of losing out to inflation. Another issue faced by women is the fact that they are more likely to rely on the advice of others. Research also indicates that women are more likely to ask for advice. If a woman asks a shady financial professional for advice, she runs the risk of being taken advantage of because she might not trust her own abilities enough to take a stand when someone recommends an investment that isn’t right for her.

Of course, not every woman is an amazing long-term investor, and not every man throws caution to the wind and risks huge losses. There are many shadings to investor behaviour, and getting caught up in generalizations can damage your portfolio in the long run. The key is to look at the data, and use it as you monitor your own behaviours. These studies can make you aware of your own investing strengths and weaknesses, as well as help you identify your partner’s investing tendencies.

Finding the balance

Honestly evaluate your own investing style. Do you follow the patterns common to your gender? How are you the same? How are you different. Now, look at your partner. Does he or she follow norms? Where are the departures from the norms?

If you take too many risks, and are overconfident with your investments, you should look to your partner and see whether or not you could learn from tempering your impulses. On the other hand, if you find that your investments are too conservative, and don’t provide a high enough return, you might want to add a little more oomph to your portfolio. It’s also a good idea to stop relying too heavily on someone else for your investing decisions and follow the instincts you’ve developed after completing your research.

One of the best strategies might be to create a portfolio using index funds and index ETFs. These investments are usually low-cost, and it’s possible to spread some of the risk around and receive instant diversity for your portfolio. A portfolio with a mix of stock funds and bond funds can provide some of the stability and safety that one partner craves, while the stock funds provide the other partner with some of the inflation-beating growth needed to truly build wealth over time.

Your best strategy is to avoid extremes whenever possible. All-market funds make great compromises between couples with differing approaches to investing. If you have extra capital, you can divide it up between the two of you, to invest in a way that makes you more comfortable.

However, before you simply invest that capital the way you want, consider taking some of that capital and investing the way your significant other would. If you are the cautious one, consider using a small amount of your capital (that you can afford to lose) and trying to be a little reckless. Likewise, it might be a good idea for a more reckless partner to step back, and take the time to research investment options and choose a value stock or other asset that has the staying power to get through a market downturn.

By moving a little bit more toward your partner’s investing style, you have the potential to build on your own strengths as an investor, while at the same time reducing some of the risks and weaknesses that might be plaguing your joint investment plan.

Tom Drake is a financial analyst and personal finance blogger living in Airdrie, Alberta. He writes at MapleMoney.com and FinancialHighway.com

 

Sources: http://faculty.gsm.ucdavis.edu/~bmbarber/Paper%20Folder/QJE%20BoysWillBeBoys.pdf

http://www.amazon.ca/Hour-Between-Dog-Wolf-Risk-Taking-ebook/dp/B0070O8BX2/

http://www.prudential.com/media/managed/WP6GenderSupplement.pdf

https://pressroom.vanguard.com/content/nonindexed/Equity_abandonment_in_2008_to_2009.pdf

 

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