Women should have appetite for risk in growing money for retirement
MEN and women demonstrate different investment behaviour. Research shows that women tend to be risk-averse and conservative in their investment behaviour whereas men are likely to be overconfident when it comes to investing.
Due to social norms and tradition, women are inclined or expected to put family first. It is possible that because of the nurturing characteristics of women they are inclined to preserve capital for the rainy day. The challenge with that behaviour though is that every dollar earned is losing purchasing power over time. Some level of risk is required for growth and with women having a longer life span than men, women should have an appetite for risk in growing their money for retirement.
But what is risk? It is the likelihood that something unexpected or unplanned may occur. This is the reason why all investors should have a diversification strategy that includes low-risk investments to preserve capital, especially in the short term, and high-risk investments to grow funds exponentially in the long term. Risk appetite is the amount of risk an individual is willing to accept in pursuit of financial objectives or goals. Risk should be aligned with reward. Risk tolerance refers to how much risk an investor is willing to take based on prevailing circumstances and asset value. Being risk averse is simply an avoidance of risk. In such a situation the investor seeks capital preservation rather than the prospect of above-average return.
A psychological research showed that in the area of investing in the financial markets, men are involved in more trading activities than women. Due to overconfidence men are likely to make changes to their stock portfolio more often than women, resulting in women having a higher net return on their stock trading than men. The dominance of men in the financial markets can translate confidence to overconfidence and with women being more cautious this behaviour can lead to timidity.
According to a study by investment management company Merrill Lynch, the gender difference that has the greatest impact on investors’ behaviour is “men and women reported levels of financial knowledge”. In comparison to men, women will more readily admit that their knowledge of financial markets and investing is low. This, therefore, means if women are equipped with the necessary financial knowledge, then more women will invest in the stock markets and will take risks, thus reducing the gap between men and women investing in the financial markets. Financial knowledge is key for women to grow their investments, especially since they are likely to outlive men. According to the 2022 Forbes World’s Billionaires’ List, just about 12 per cent of the billionaires are women. Majority of the women on the list inherited their wealth and the others were self-made. These self-made female billionaires either “founded or co-founded a company or established their own fortune”.
With financial knowledge women can gain the confidence to make financial decisions that will create financial freedom and generational wealth. A professional and experienced financial advisor can assist women in creating a financial plan that is designed to realise their dreams. Regular reviews of investment portfolios is important for women to build trust and remain focused on their goals. I have both genders as clients and find that women who are eager to understand how the different investment portfolios work will make informed decisions and the necessary mindset shift.
A survey by Fidelity Investments showed that only one-third of females regard themselves as investors. Last week I interviewed a female client who desired to close her equity account. She argued that the local stock market has been down and is likely be down for some time. Her long-term goal remains the same, but she sought to convince herself that she is risk-averse. The question though was to identify her tolerance for risk. When presented with the historical performances over the last 20 years, including the negative performances of 2020 and 2022, the fund was averaging 18 per cent per year. With all her questions answered she decided to rebalance her account. Instead of closing her long-term account she has created a separate account for emergencies. Knowledge is power.
Females may save more than men, yet most investors are male and more men invest in stocks than women. Wealth creation begins with investing as money is put to work, whereas savings is storing up money to be used later, only to lose great purchasing power due to inflation. Both genders can learn from each other. With men tending to interrupt their investments more often than females, based on short-term market conditions, they would benefit from greater growth on their long-term investment if they are more patient. On the other hand, if more women invested more of their savings in the stock market, they would have more funds in retirement. Understanding our individual behaviour towards money will make a big difference in achieving financial success.
Grace G McLean is financial advisor at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial. com. She is also a podcaster for Living Above Self. Email her at livingaboveself@ gmail.com.