Women and investing: An abundance of caution
The American College
Pop quiz! The acronym: F.E.A.R.1 stands for:
1. False evidence appearing real
2. Finding excuses and reasons
3. Forget everything and run
4. All of the above
These days, we have become used to and almost numbed by waves of fear and terror in the wake of market meltdowns and institutional collapse. When it comes to individuals making investment decisions, acting on fear is almost always wrong. Emotionally driven investing, motivated by the vicious cycle of greed (the hope of markets rising, the fear of markets falling) leads those without a strategy to buy high and sell low.
As a consequence, when high-profile financial experts exhort the public to dispose of equity investments for capital needed in the next five years, we see a huge sell-off in the market. One wonders why investors would be holding equities for a relatively near-term goal in the first place.
Healthy skepticism? When a little fear might be a good thing
Fear can sometimes work to the benefit of investors when first contemplating an investment strategy -- before the actual investing takes place. Here's where a woman client and her competent, ethical investment advisor perhaps have some advantages. Since a significant percentage of women are apprehensive about investing, there is a tendency for them to rely more heavily on financial professionals than men.
In a 2006 Harris Poll for Charles Schwab, 48 percent of women agreed with the statement "investing is scary for me." It is worth noting that this was twice the rate of men who shared the same sentiment.2
Academics speculate that one underlying reason for this apprehension is rooted in a gender stereotype of investing which historically has been male-biased. Industry and academic studies reveal that boys are typically more encouraged to earn and save earlier; as well as excel in math than girls are. Findings of the landmark Gender Investment Comparison Study -- conducted by the Dreyfus Corporation and the National Center for Women and Retirement Research -- illustrate these points.
First, the survey found that sons were more likely to be encouraged by parents to earn money at a much earlier age (13) vs. daughters (16-18). In addition, boys were twice as likely to be encouraged by their parents to save money. The study also found that women who were well-supported in academic and math achievement by parents or teachers early in life were more confident with math during school, and later, more confident in their financial management abilities. Conversely, women who were uncomfortable with math during high school were more prone to financial worry in adulthood and likely to be more conservative in their investment choices.3
As a result of these influences, what some call "cultural imprinting," many women approach investing with more than a little insecurity. Indeed, more than three in four women studied by Oppenheimer Funds indicated they wish they had learned more about investing growing up.4
Not that a little "investophobia" is all that bad when it leads to looking before leaping and taking a long-term view. In a recent survey by the FINRA Foundation, 79 percent of female respondents described themselves as wanting to know all the fine print when learning about investments.5 Women not only want to do their homework, but once they make an investment selection, most also tend to stick with it longer than men do. Men tend to be the more confident investors, as they trade 45 percent more than women do, according to research done by The University of California at Davis.6 The study goes on to suggest that by trading more often and without enough research, men may increase their transaction and capital gains costs, along with reducing overall returns.6 Is the proof in the pudding? Portfolios managed by men in the same survey significantly underperformed (-1.4 percent) investment returns generated by women.6
In light of a common lack of confidence, women often seek out professional help in creating a sound investment strategy. Industry studies have consistently shown that approximately three in four women working with an investment advisor feel more comfortable with investing, and nearly two in three feel more confident about having money for the future.7
Faced with the trying investment climate we find ourselves in, how do we as financial professionals help our female clients overcome fear and lack of confidence?
It's the purpose -- not the product
Many in the public, the media and, yes, some financial professionals become far-too enamored with investments as "the end" rather than "the means."
In my own financial planning practice in an affluent suburb of Washington, D.C., the great majority of clients -- both male and female -- came in with investment products about which they had very little knowledge. Most lacked clarity about basic investment parameters to achieve their goals. Among these parameters: the amount of capital and/or systematic investments required, risk management tactics, return objectives and time horizon. Even fewer still had gone through an exercise to determine their risk tolerance with respect to their investment goals.
As such, most of these clients, often relatively wealthy and well-educated, were completely lacking a well-thought-out investment purpose and strategy. They simply purchased financial products based on a "tip" or the reputation of investment firm without having a game plan. This is the equivalent of buying ammunition for war, but not having a battle plan in place beforehand. The absence of a well-thought-out strategy and contingency plan creates chaos and emotionally driven decision-making. Sound familiar?
In challenging times like these, we can bring enormous benefit to clients regardless of gender by:
- Refocusing them on their goals
- Re-evaluating their current and anticipated financial position
- Educating them on the alternatives (including respective costs and benefits)
- Systematically (re-)aligning the investment strategy to meet their goals
- Demonstrating that we will be around, regardless of what markets or investments do
1. Acronyms.thefreedictionary.com, March 2009
2. "Why Women Make Better Investors," Louth, N., MSM Money, 2006.
3. "Frozen in the Headlights: The Dynamics of Women and Money," FPA Journal, 2000. 2000 citing findings on the 1997 Gender Investment Comparison Study, Dreyfus Corporation and The National Center for Women and Retirement Research
4. Women & Investing Survey, Oppenheimer Funds, 2006.
5. "Gender Differences in Investment Behavior," Tahira, H., FINRA Foundation- Iowa State University/NASD, 2006.
6. "Warren Buffett Invests Like a Girl," TheMotleyFool.com, March 20, 2008.
7. Women & Investing --Make it happen! Oppenheimer Funds' Women & Investing Survey, 2007.