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Women, It's Time to Get Off the Fence

January 29, 2019

Women in finance

Gender income and leadership inequality continue to receive a lot of attention. The good news is that changes that work to level these imbalances seem to be happening. Companies are beginning to recognize that adding women to leadership roles and management teams makes the organizations better. More women are being invited to the table, are "leaning in" and becoming a more powerful demographic. However, the pay gap is not the only financial challenge that women face. Not only do we earn less, we also live longer and tend to take more career breaks. Therefore, in terms of managing our money, we can’t be content to do as well as men, we must do better. Smart investing is crucial to financial security and independence. It also provides freedom to pursue opportunities and can prepare us for life events. Unfortunately, when it comes to investing, women are coming up short. 

What Is the Investment Gap? 

Simply put, women are less likely to invest their money into the market. Those that do generally are not investing as early as men. In fact, women are more likely than men to keep their money in cash. Cash is a great place for emergency funds, quick access and short-term needs. It might feel safe, however, for long-term goals, inflation risk and near-zero returns will eventually result in a loss in purchasing power. Not investing can amount to hundreds of thousands of dollars over the course of a lifetime. In turn, this can be an extremely costly mistake. So why are so many women sitting on the fence when it comes to investing? The two reasons most often cited - lack of time and lack of knowledge. This is not surprising, but these obstacles can be easily corrected. The first step to combating this gender investment gap is to understand the price we pay for not taking the risk to invest.  

What Is the Price Women Pay for Not Investing? 

Investing has the potential to grow our money in a way that savings cannot match. Consider the scenario of adding $10,000 per year for 30 years into a savings account that had an annual return of 1%. After 30 years $300,000 in contributions would have been made with $51,328 in earnings for a total of $351,328. If on the other hand those funds were invested in a portfolio that had an annual return of 8%, after 30 years there would be $923,455 in earnings for a total of $1,223,455. Instead of thinking about risk in the sense of losing money when investing, we should think about another risk concern – our savings won’t grow enough to provide an acceptable level of income for retirement. Sitting on the fence not only can keep us from retiring but from achieving other financial goals like buying a home or starting a business.

We all know that money is power and not having enough can put us in a vulnerable position. It can mean the difference between being in control of our future and being handcuffed to a bad situation like a job we don’t want, a boss we don’t like or a relationship we want to get out of.

Who’s the Better Investor? 

So, men may be more confident investors, but does that make them more competent? A growing body of evidence shows that not only are women better savers, they actually tend to outperform men when it comes to generating a return on their investments. Men tend to own overly concentrated portfolios and buy and sell much more often. This excessive risk and frequent trading are blamed on male over-confidence and can eat into returns. Attempting to master the art of market timing is almost always a losing battle.

Kathy Kristof, contributing editor for Kiplinger’s Personal Finance, discusses how “Women approach risk differently than men do. Studies show that men are more inclined to behave like baseball sluggers, who swing for the fences, even if it means running the risk of striking out far more often. Women, by contrast, are more like contact hitters, who are satisfied with a string of singles.” Because we approach risk differently, women are less likely to see huge ups and downs in our portfolios. Instead, we have a consistent investment strategy to grow our assets over time. By staying the course, we not only avoid the pitfalls of market timing, we also minimize taxes and transaction costs. All these factors will help with long-term returns and portfolio longevity.

How to Start Investing  

Many folks in our industry falsely portray investing as a complicated science that requires a PhD in economics and constant vigilance. By building up this seemingly overwhelming task in our minds, it makes it even easier to continue sitting on that fence. Having over twenty years of experience as a financial advisor, I am well aware of the poor job the industry has done speaking directly to women and catering to their specific needs. 

Knowing, understanding and following some simple guidelines is the absolute best way to start investing confidently. Education spurs action. Therefore, when it comes to your financial education, don't ignore, don't delegate and don't let it get lost in the shuffle. Seek advice from an expert you can trust. Develop a relationship with an experienced financial advisor. They will guide and help you make decisions based on your specific situation. 

Over 90% of women will have to manage their own finances at some point in their lifetimes. Often that point comes during times of stress and uncertainty. Don't wait until then. Like so many other things, getting started is the hardest part…and getting off that fence may avoid a few splinters.  

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Editor's Note: The post was originally published in June of 2017 and updated to reflect current rules, regulations, and statistics.