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From how they seek information to how they set goals and manage expectations, women may help identify important dos and don’ts for any investor.

Women today are economic powerhouses. They now own 40% of America’s privately owned businesses and hold half its wealth — estimated to be $11 trillion of a total $22 trillion by 2020.1 Two in 10 married women outearn their husbands,2 and over the course of a family’s life, 90% of women will control its wealth.3

It’s no surprise then that women’s behavior as earners, investors and savers is the subject of a large and growing body of behavioral economic research, which has yielded important findings. For example, when women do invest, they tend to look for informed advice and thus may have a better rate of return than men.4,5 But women can also be too conservative in their approach, especially given the fact that they tend to live longer than men. Ultimately, from the way they seek financial information and advice to their understanding of the long term, women’s financial behavior holds crucial lessons for all investors, regardless of gender.

Gathering information vs. flying solo

Research shows that while men tend to overestimate their financial competence, women seek information: They get help, and compile data upon which to base informed decisions. In a large 2011 study, Spectrem Group, a private research firm, found that 46% of affluent and 82% of very high-net-worth women rely on financial advisors. Furthermore, they demand clear, in-depth facts from those advisors before acting.4

The result of getting informed investment advice? Annual returns that are two percentage points higher a year versus those of people who didn’t seek experts’ input, according to one study.5

Men, by contrast, “are substantially more overconfident about their relative performance,” notes an often quoted study on gender and behavior in the Quarterly Journal of Economics.6 Yet another study notes that instead of backing off, they’re “more likely to see a risky situation as a challenge.”7

Slow and steady vs. frantic and impatient

Women also tend to limit their trading far more than men do. They prioritize protecting principal rather than taking risks to grow their assets (6 in 10 wealthy women surveyed by Spectrem made that choice).4 A study by the University of Michigan’s Retirement Research Center found that men frequently and unnecessarily trade their holdings (what it called “disproportionate portfolio churning”). All other things being equal, the male participants traded 56% more than their female counterparts, and the more they traded, the worse their performance became — “a result of a too-rosy estimation of their own investment skills,” the researchers wrote. One reason for the inferior returns was the triggering of fees.8

A landmark study on gender differences in stock investing also found that men tended to sell too early, or to swap assets for new ones that underperformed what they had sold. The women, by contrast, were more inclined to take the long view, understanding that performance in many cases is best measured over time.9

By the same token, different financial periods can call for different approaches. For example, the current low-growth environment in the U.S. may require a more active mentality when it comes to investing. Luckily, this is where women’s aforementioned penchant for seeking informed advice before making financial decisions can help them.

Facing facts vs. undue optimism

A nationwide Society of Actuaries study found that women expect to need more money during their later, less active stages of retirement than in the earlier portion, whereas men are less willing to acknowledge the costly physical and health challenges that may lie ahead.10 That could be one of the reasons women tend to be less optimistic than men regarding financial outcomes and to prepare for hard times in a constructive way. During the recent recession, the Society of Actuaries study found that women of all income levels reduced purchases to compensate for income and savings losses.10 And Spectrem Group found that wealthy women reduced debt levels more than men did during the downturn.

The downside — and overcoming it

Unfortunately, women’s strengths don’t erase the challenges they may face when it comes to money. Mothers and caregivers often have to take lengthy leaves from their careers to care for kids or aging parents, lowering their contributions to employer-sponsored retirement plans and costing them years of the company match. Living longer, they may outlast their funds or spend more time ill. They may also err too far toward risk avoidance. As a result, they need strategies that complement the strengths noted above and offset several distinctive problems:

Start early. To reap the rewards of their patience, women should plan ahead and accumulate enough cash to invest. That means maximizing contributions to a 401(k) early. Even a small monthly amount, done early and steadily, makes an extraordinary impact a lifetime later. Unfortunately, studies show that most don’t start saving early enough. In other words, it’s very important to have a conversation with your Financial Advisor early.

Don’t be too risk averse. While their prudent, well-informed approach can help protect women from losses, being too cautious can prevent women from achieving the growth they need. One study showed women leaving 20% of their assets in checking accounts.11 They can also often be too busy balancing family and career to take time to rebalance their portfolios or review their assets. Insufficient diversification — leaning on CDs, shunning equities and relying too heavily on less risky bonds — may limit the potential to generate sufficient income from a portfolio and allow inflation to reduce the portfolio’s purchasing power over time (and, given women’s longer life spans, the long term is critical). Over the long term, shunning stocks in favor of bonds can mean a portfolio isn’t properly diversified and so may not combat the eroding power of inflation.

Offset your challenges. Shifting into part-time or flextime work to be caregivers can result in missed opportunities to save and lower Social Security benefits. But there are smart, preventive steps to take. Setting up tax-advantaged retirement accounts and adding to them yearly, regardless of work status, can make a significant difference. Part-time workers can open and fund individual retirement arrangements (IRAs); the self-employed can take advantage of Simplified Employee Pension (SEP) IRAs. Married women with no income may be eligible for a spousal IRA, set up and funded by their partner. It’s often sensible, after leaving a company, to roll over 401(k) funds to a rollover IRA, which makes asset management easier and generally offers broader investment choices.

Finally, for women whose current employment puts them in a lower tax bracket, converting regular IRAs to Roth IRAs could make sense. Roth IRAs are taxed now (not later) and have the potential to grow tax-free. Qualified withdrawals during retirement are tax-free. You should consult your tax advisor before making these decisions.

Be prepared. Women’s admirable sense of realism is not all-encompassing: They can fail to factor the cost of a longer life into their financial strategy. The Social Security Administration says U.S. women outlive men by five to seven years; those reaching 65 can expect to live an additional 20 years.12 Living longer means potential for increased medical costs: The Employee Benefits Research Institute says a woman retiree of 65 may need $242,000 in savings for health care, insurance and other health expenses (if she has no company, military or union plan).13

It’s a common misconception that health insurance and Medicare will pay for assisted living or a nursing home, but that’s usually not the case. That makes it important for all investors, especially women, to consider whether long-term care insurance might make sense. Studies show that most women hope to pursue travel, hobbies, philanthropy and generational bequests,14 and having savings in place frees them to do so. They should also consider guaranteed-income insurance products such as annuities, which involve paying a premium in a lump sum or installments in exchange for a guaranteed income stream in retirement. And they should defer taking Social Security payments as long as possible, since deferring increases the payment. Finally, they should explore, if a spouse has a pension, adding survivor benefits to the policy.

There’s little doubt that women’s financial behavior and preferences across situations show major differences from men’s. Women’s financial strengths are significant, but so too are their challenges. In the end, this type of careful and informed approach to investing and saving, when coupled with early planning and forethought, can offer a powerful example that all of us could use to better control our financial destiny.

http://www.forbes.com/sites/merrilllynch/2011/10/21/what-women-can-teach-us-about-money/