Women face greater obstacles in investing and obtaining financial freedom. Getting paid less means fewer resources to work with. Living longer means greater demands on resources, both due to additional years and greater healthcare costs. In addition, women have greater financial demands placed on them than their male counterparts do; it’s simply more expensive to be a woman today.
The financial burden is real and quantifiable. Also quantifiable is women’s generally superior investment performance. Studies show women investors produce greater returns with lower volatility.
Producing greater returns won’t make up for the additional burdens. But it is something we can all learn from.
Woman and Investing: The Income Challenge
Women in America earn, on average, 80 cents for each dollar their male counterparts earn. To eliminate this gap woman, would need to be paid, on average, 25 percent more than they are currently being paid — while holding men’s incomes steady.
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Earning less makes it more difficult to save and makes it more difficult to invest. People tend to try to save or invest from what’s left over after expenses. The less you have for expenses, the less likely there will be anything left after expenses. Even those who allocate to investments before allocating to expenses are constrained by lower income. Having less to work with is having less to work with; there’s no easy solution to that.
Lower income translates to lower retirement savings. We’re taught to save percentages of income for retirement; lower incomes at the same percentages means lower savings. Nor are percentages an appropriate determinant of need. Women can expect, on average, to live longer into retirement and to have greater healthcare costs in retirement. If incomes were equal, women would still need more savings. They have less.
Investing Differences Between Men and Women
Though women tend to state different preferences from an investing standpoint, such as increased environmental consciousness, this doesn’t necessarily play out when the dollars go into the market. The performance difference between the genders appears instead to be rooted in behaviors.
Men are more likely to believe they are good at managing money and are good at investing. Their confidence has a downside.
Men trade more often than women. Men are more likely to make impulsive decisions and trade based on their perceptions about the economy and the market. Women are more likely to let their investments ride through market changes. They don’t overestimate their ability to outmaneuver the economic conditions to produce some phantom outcome.
Behavior is the driving force behind investment performance. It is a major reason that rigorous adherence to an asset allocation strategy works well. It prevents the emotional trading that often follows changes in the markets.
Men, more so than women, tend to think they can make changes that will produce a benefit during times of change.
The evidence doesn’t seem to support their self-confidence. It’s not that loss aversion is gender-specific; it’s that men think they can make changes to improve their situation and those decisions tend to cost them. Emotion-based trading results include purchasing into assets that have dramatically appreciated in order to try to get some of that gain or selling assets that are down to prevent additional loss.
These emotionally driven behaviors tend to produce inferior results and are more likely to be perpetrated by males who believe they know what they’re doing. Emotionally we may want the opposite of what we need. We should be selling appreciated assets to protect gains and buying into down assets to take advantage of future gains.
It seems there’s always a downside to compensate for the advantages. Where women tend to fall short is not in investing results, but in getting off the sidelines.
My observation in working as a financial advisor for many years was that men tended to want to skip over having an emergency fund or want to invest their emergency fund into a high-flying tech stock. As an advisor, I needed to talk them down to reality.
Women tended to want to keep more in cash than they could afford to. It wasn’t uncommon for a woman to have a year’s worth of savings stashed in a savings account and be very reluctant to move any of that into investments with any potential risk.
I haven’t seen any research on this, but it still seems like just different perspectives of risk. The tendency for overly confident men may be fear of missing out on opportunity by having their money in cash. Women are perhaps more fearful of not being able to navigate a financial hardship due to lack of funds.
How to Invest Like a Woman
There are other apparent differences between the sexes.
Women seem more willing to ask for help and more receptive to advice.
Combining some information culled from research with my own opinions and experiences as a financial advisor, I posit the following five keys as ways anyone can invest more like a woman to improve their results.
1. Have a Plan
Women tend to look at what they want to accomplish, which allows them to design a plan to get there. Men are more likely to want to know about their investment options before even considering why they’re investing. Those who build investments for specific goals are far more likely to achieve their goals.
2. Build and Maintain an Emergency Fund
There are reasons why this advice is universal in the financial world. A cash reserve or emergency fund is foundational in helping you navigate life’s turbulent financial times. An emergency fund helps you navigate whatever you might be going through, and in many cases, it prevents you from accumulating debt due to chance happenings. You can’t go forward while you’re going backward. An emergency fund is essential to prevent you from going backward during ordinary emergencies.
3. Invest systematically
Men may do this more often than women with their retirement accounts, but they may not hold a clear overall advantage here. I would argue that women who invest are at least as likely, if not more likely, to make systematic additions to their investments. Systematic investing makes you do two things: By investing systematically you’re paying yourself first. The money is being allocated, and you have to deal with what’s left over for living expenses. And systematic investing forces you (unless you change things!) to continue investing into a down market, which is the most important time to be investing.
4. Buy and Hold
The research attributes this factor as a primary reason women who invest tend to outperform men who invest. Have a plan, invest according to your plan, and don’t change unless your goals change. Certainly you should periodically review the alignment between your investments and goals. But short-term market fluctuations are not reasons to deviate from your long-term strategy.
5. Get Help
There are a plethora of resources available. There are online resources, robo-advisors, and all kinds of human financial advisors, accountants, and tax professionals. So there’s no reason to make decisions without adequate information. No one knows everything. The best are always trying to improve themselves, and in many fields having a coach is normal. You don’t have to go it alone.
The Bottom Line
All of these pieces together help produce superior results. Women tend to have an advantage in doing most of them. If they weren’t working from a disadvantaged position to begin with, that would probably be far more apparent.