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Women and Money
August 20, 2009

Women are as good as men when it comes to financial matters,says Assistant Professor of Finance, Lily Fang, of INSEAD.

Author : iFAST Editorial Team

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It’s a perennial debate – are women as good as the men when it comes to financial matters? The financial world has traditionally been a male-dominated environment (and to a certain extent, it still is today) but more and more female finance professionals are making inroads in this industry, debunking the myth that they are not as capable as their male counterparts when it comes down to the dollars and sense of the financial industry.

In actual fact, gender is but one part of the entire equation, and there are those who believe that gender is irrelevant when it comes to determining capabilities associated with money management.   

In March 2008, Prof Fang presented on the topic, “Women and Money: Are women better investors than men?” at the INSEAD’s Best of Women Management event. We caught up with Prof Fang recently to get her insights on this issue, and how women should manage their finances.

Prof Lily Fang joined INSEAD as an Assistant Professor of Finance in 2003. She holds an MA and PhD in Finance from the Wharton School, University of Pennsylvania. Prior to studying finance, she studied mathematics, actuarial science and management science at Simon Fraser University, Vancouver, Canada.

FSM: Financial literacy among female investors is on the rise, but many women are still hesitant to invest their hard-earned money, or even manage their own finances. Why do you think this is so? What more needs to be done to address this issue?

Lily Fang (LF): To the extent that some women are not financially independent, they may have no choice other than leaving her financial planning to her husband/father. For those who are financially independent, one reason that they do not manage their own finances is that they still do not feel confident about money and investment matters.

To address this issue, education is very important. Women should understand that a man is not a financial plan. Financial independence should be encouraged. Women should also know that men are not better than managing finances than women – this has been confirmed by much academic research. Thus, they should be encouraged to take control of their own financial planning.


FSM: You probably get this question quite often: “Are women better investors than men?” Is this a fair question to be asking?

LF: This is a natural and tempting question to ask. The answer is that in terms of performances, the two genders turn out to be about the same. But their investment styles are clearly different. Women tend to be more risk averse, holding more diversified portfolios. Since risk and return are positively related, this lower risk leads to slightly lower gross returns on women investors’ portfolios. But this is offset by the fact that women tend to trade less frequently then men, so they do not incur as much trading costs. Thus the net, after-cost performance between men and women are quite similar, at least based on studies in developed markets such as the US. Frequent/excessive trading is interpreted by academics as a sign of over-confidence. Men seem to exhibit this trait more than women.


FSM: Why are there still fewer active and/or professional female investors than men? At the risk of over-simplifying the issue, it has also been argued that we are facing this current financial crisis because of a lack of female money managers on Wall Street (among numerous other reasons). What are your views on this argument?

LF: For better or for worse, the trading floors are still dominated by men. This is a complex social issue that cannot be easily addressed overnight. I believe the modern financial corporations have done their fair share to encourage female participation in their work force. But the attrition rate among junior female bankers/investment professionals is higher than men because women still face the career/family conundrum more than men do. And many women (by choice) give up, or take a break from their career. This is a self-reinforcing cycle. I do not believe this situation will change any time soon.

Whether the financial crisis would have been less severe, or averted, had there been more women in charge on Wall Street is a counter-factual argument that nobody can be certain of. It is an interesting hypothesis and I see where this argument comes from. Women investors may weigh the pros and cons of a trade more carefully then men. And given that women tend to be more risk-averse, and given that the crisis was fundamentally rooted in the fact that wrong type of risks were taken at the wrong (inflated) prices, perhaps the situation would have been better if more women were in charge – as their internal risk gauge would kick in and certain investments would not have been made.

But clearly this is just an entertaining thought. The situation may not have been different at all, because those women who can make it to be money managers on Wall Street may have different risk appetite and characteristics than the average female investors – don’t forget there will be a self-selection bias. Thus, I certainly would not go so far as to agree with the argument, though it is an interesting thought.


FSM: What is your personal investment/wealth management philosophy? How did you get started in investing?

LF: I do not “day trade”. I do not do stock picking. Like many academics, I hold passive, diversified portfolios such as the STI ETF (Exchange Traded Fund). Diversification is also important. But this can be achieved nowadays quite easily by investing a number of ETFs.

From my academic training in financial markets, I have a deep appreciation of the fact that it is hard for individuals to outperform the overall market. In other words, even though markets are not always right (in academic parlance, we say “market has inefficiencies”), it is extremely difficult for an individual investor to out-smart the overall market, and do so on a persistent basis. Perhaps the only person who managed to do so in our lifetime is Warren Buffett. This should make the average investor very humble. This is perhaps why most academics hold passive, inexpensive ETFs or index funds, rather than doing their own stock picking and day trading.


FSM: Who are your favourite investment/financial planning role model(s)? How have you been influenced by them?

LF: We are all inspired by Warren Buffett, of course. I in particular learned two lessons from anecdotes we hear about Buffett’s investments. First, he does not time the market in the sense of what many small investors try to do. Many individual investors try to pick the peak to sell and pick the bottom to buy. In doing so, they would digress from the goal that they set out to achieve, only to regret it later. Daily timing is impossible to do, even for Buffett. Instead, once he has made the decision to buy or sell, he sticks through the decision, carrying out the transaction in a period of time, ignoring the daily fluctuations. All too often, investors give up on their pre-set goal and start chasing the top or the bottom, only to see that their build-up gain turn into losses. Discipline is key. The second lesson I learned from him is not to invest in anything you do not understand. This is very humbling for the rest of us.


FSM: What are the compelling reasons behind why every woman should have their own financial plan?

LF: Women have longer life expectancy than men. Women also have lower career income, due to shorter working careers and possibly lower pay. These two are the most compelling reasons that women should have their own financial plan.


FSM: How can women begin to plan their finances in a smart way?

LF: One key thing is to start early. Start saving, no matter how little the amount, as soon as one lands the first job. The habit of responsible savings and investments will serve one well in the long run. Persistence is also very important. Based on needs, one should set an investments/savings rate goal and follow through. Again, being disciplined is the key.


FSM: From an asset allocation perspective, do women need to invest differently from men?

LF: I don’t think gender matters as much as age in terms of asset allocation. When one is young, one can afford to take more risks in investment – a higher allocation to stocks, lower allocation to bonds will give you a higher return over time, due to the equity risk premium. As one grows older, the allocation to risky assets such as stocks should be trimmed down, and allocations to safe, fixed-income assets should go up.


FSM: If there’s one key message that all women have to bear in mind when it comes to money management, what would that be?

LF: In addition to learning and improving our financial literacy, women should approach investing with confidence: Women are as good as the men when it comes to money matters. 

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