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Women and Investing: 5 Ways to Approach Risk More Comfortably

7 Minute Read

women-and-investing-chart-2.jpgThe standard cliché describing the difference between men and women investors is that men tend to be more daredevil, motivated by risk-taking, while women tend to veer away from potential risk and tread more cautiously in search of guaranteed security. Borrowing from the 1992 bestseller, in some ways it might be said that men invest on Mars while women invest on Venus.

While neither gender is a homogenous group, research data show that their investing patterns do differ in ways that can offer worthwhile lessons for both sides of the Mars-Venus debate. Generally speaking, when it comes to women and investing, women might want to think about investing a greater share of their assets and taking on a greater degree of risk appropriate for their age, situation and financial goals. Meanwhile, male investors would benefit learning the value of patience and the effect it can have on portfolio performance from their female counterparts.

The first step to learning is a better understanding of some of the more generally acknowledged differences between the genders. Here’s what the data show:

Different investment styles for different genders

Women are more patient. Across the board, men are more likely to embrace what some call a “lottery style”approach to investing—picking more speculative or lowerpriced stocks and hanging on to them at a loss, while selling off winners that stand to grow in value but take longer to deliver significant returns. Women are more patient investors than their male counterparts according to research about women and investing. They tend to take a “buy-and-hold” approach and trade less frequently, even during a downturn.

Women are more resistant to risk. There is inherent risk in any investment, among which is potential loss of principal, and maintaining an awareness of this is of benefit to the investor. But women’s heightened risk-sensitivity and lower investment risk tolerance has dual implications: while they’re better than their male counterparts at the “buy-and-hold” approach, they are more likely to focus on stocks with good track records, limiting their upside opportunities by missing out on riskier, but more lucrative, investments that can deliver strong returns over time. Since the purpose of investing is to earn maximum profit at minimal risk, a certain level of risk needs to be undertaken to earn a decent level of return. In the end, it is better to be risk-diverse.

Women are less confident investors. While women tend to feel confident when it comes to financial matters like the family budget, a recent study found that only about half (52 percent) say they are confident about investing, compared to 68 percent of men. Some research shows though that this lack of confidence is unwarranted based on portfolio performance. A 2017 study found women’s portfolios outperforming men’s by an average of around 0.4 percent, while a 2018 study found them seeing 1.8 percent higher returns.

Fewer women than men invest in the stock market. Women are less likely to have their savings fully invested in equities than men and tend to hold a greater percentage of their assets in cash because it feels more secure to them. But over time, their cash holdings decrease in value due to inflation and offer limited growth potential—counter to the concept of “building a nest egg” for retirement. In the 2018 Bank of America Women and Financial Wellness study referenced above, 41 percent of women said they wished they had invested more of their money.

Women have less money to invest. Although the gender pay gap is narrowing, its pace is persistently slow. According to Pew Research, women earned 85 cents  for every dollar a man made in 2018. In addition, they are typically the ones to interrupt their paycheck-earning years to care for children or elderly family members in the home. This in turn causes them to qualify for both lower 401(k) and social security benefits.

This leads many experts to contend that women aren’t necessarily more conservative with their investments, but rather more considered or cautious in the decisions they make with more limited resources. In fact, men and women with the same financial resources at their disposal are equally likely to take a chance on riskier investments. However, with women both being five times more likely to live paycheck-to-paycheck during their lifetimes than men—as well as living longer than men—the choices they make allocating their wealth can benefit from a strategy that ventures beyond caution.

Chart - Women and Investing: How Women's Portfolios Perform in Companison to Men's

5 ways to confront risk more comfortably

  1. Don’t be afraid to take on some degree of risk. All forms of investing involve varying degrees of risk. The only thing we can do is to attempt to minimize the risk, not eliminate it. This is why every investor needs to tolerate some level of risk. While heightened risk awareness can help avoid unnecessary losses from short-term speculation in the markets, women who concentrate their investments in lower-risk assets, such as cash and fixed-income securities, while steering clear of riskier equity markets, might then be confronted by another type of risk—falling short of their retirement and other long-term financial goals. In other words, they are likely to pay a high opportunity cost.
  2. Work with a financial advisor. Talking with a financial professional can help overcome some of the fear associated with investing, and identify the appropriate investment risk tolerance. This will help find the balance between too much and not enough investment risk that is right for you considering your financial situation and baseline goals.
  3. Seek financial education. Research shows that 88 percent of women say more financial education would provide them with greater confidence in managing their investments. The good news is that supporting women’s financial independence is a growing priority for many organizations, making it more likely for there to be some form of relevant financial education available to you through your employer. Alternatively, joining a community of like-minded investors, such as an investment club, can also help. Meeting to discuss money and investing with other women is not only a good way to share ideas and get feedback, but it can also be self-confirming, helping you feel more encouraged and confident going forward.
  4. Do your homework. Conducting research, assessing opportunities, and sizing up the right amount to invest based on both your assets and your risk level, are skills like any other. One good way to develop them is to first test the waters with small-dollar equity buys—a strategy that can help grow your knowledge, tolerance for risk, and horizons of investment interest over time.
  5. Focus on diversification. Highly diversified investment vehicles, such as exchange-traded funds that give you an investment mix tailored to your age, goals and risk tolerance, as well as various portfolio construction techniques, can provide some downside protection and help women investors increase their comfort level with riskier assets.

There are 2 types of diversification:

  • Inter-asset diversification: This is where you invest in different asset classes so that the performance of your investment is reliant on different industries—corporate stocks and real estate, for example.
  • Intra-asset diversification: This is where you invest in the same asset class, making the performance of your investment reliant on the same industry—stocks of different energy companies, for example.

Inter-asset diversification is typically considered the more effective choice in mitigating risk because it protects your investment from a situation that might affect one industry, but not have a widespread effect across all asset classes. For example, some situations might affect the real estate market only. Therefore, if all your assets are in this market, you will be highly affected. If you have diversification among stocks, bonds, precious metals, etc., you will be less likely to suffer major losses.

Taking the first steps

While women should not abandon the buy-and-hold strategy that has their returns outperforming men’s in recent years, they can become more confident investors by pursuing education to boost financial knowledge, supporting their own efforts with professional guidance, and begin to develop an investment style that is appropriate for their particular situation. As more women make this commitment, they will become more self-assured investors—and more informed participants in the investment opportunities that unfold in the future.

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This is a publication of The Private Bank at MUFG Union Bank, N.A. (the Bank). This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third-party sources deemed to be reliable. The Bank makes no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bears no liability for any loss arising from its use.