Investing :: Directions For Women

Financial planning involves assessments about risk. The financial risks women face, and their ways of dealing with those risks, are different from men’s. This is due to very real biological, psychological, and cultural distinctions between the sexes.

As women, we

• Live longer
• Often suffer financially as a result of divorce, whereas the finances of divorcing men are apt to improve
• Are likely to live alone for a significant period of time, by choice or circumstance
• Move in and out of the workplace, resulting in serious gaps in insurance coverage and retirement plan participation
• Are better educated than men, but gravitate toward “safer,” less well-paid careers
• Are the primary caretakers of the dependent young and old
• Are more are more apt to be risk-averse when it comes to investing

Clearly, planning tools, assumptions, and focus must change way when advisors work with women.

The way we talk about women’s financial issues needs to change, too. Women’s perception and learning styles are different from men’s, but so often advisors fail to take this into account. Research has shown that men learn independently, while women learn well in supportive, collaborative environments. Men are apt to learn by doing, whereas women often stand back, listen and observe. They want to read the manual before turning on the computer.

We also know that men and women find their social identity in different ways. A man has an inherent need for competition and hierarchy in order to understand where he fits in the world: “Am I ahead of or behind the other guy?” A women, on the other hand, is more likely to find her meaning in community, and wishes to put herself on the same emotional and intellectual plane as others.

The male preference for competition may explain why the terminology of personal finance – and most particularly that of the male-dominated field of investing – is dominated by themes of winning and losing. It explains, too, the frequent use of benchmarks to evaluate investment performance. Men are more apt to ask if their portfolio did better or worse than the S&P 500 in a given quarter. When presented with the same numbers, women ask instead, “But what does this mean?” They are not asking for that meaning to be measured in basis points, but in terms of the effects on their lifestyle, their children, their plans for the next vacation.

How then can women’s distinct cognitive and emotional styles be brought to bear on financial advice? Here are some ideas for the financial advisory community to consider (or for you, as a women, to ask for from your advisor):

• Educate, but don’t teach. Provide books, websites, articles that support and illustrate the financial planning strategies you are recommending
• Empower. Share stories, especially your own, of situations similar to those your women client is facing. Women often feel alone and fearful about their finances. Examples of shared experience go a long way to assure her otherwise. Her problems are normal and have solutions.
• Engage. Don’t just provide advice, but involve her in the implementation. Have her contact the attorney, set up the investment account, call in a stock or fund purchase.

These ideas seem simple and obvious, but too many women report that they are not getting this kind of attention from their advisors. A less obvious, but emerging, concept – expressly designed for women – is to create circles where money attitudes and issues can be freely discussed. These are not seminars. Again the purpose is not to provide unidirectional advice, but safe places where women can create communal wisdom about a subject they often feel excluded from.

There’s no doubt that women’s economic power is growing and growing quickly. They are on track to control more than 60 percent of US wealth, and represent a majority in the labor force. Wall Street and investment advisors can only ignore these numbers at their own peril; The time has come to change the personal finance conversation for women.

According to the Bible, hunger for knowledge is what got Adam and Eve into a heap of trouble. One bite of the apple and so began the nightmare that has tormented us ever since: namely, finding ourselves making a big presentation to the Boss without any clothes on.

Unfortunately, not much more was heard from the first couple after their exile. It’s only now, many millenniums later, that social scientists are discovering that the acquisition of knowledge may have affected the original man and woman in very different ways. The field of behavioural finance suggests that Adam left Eden with a superabundance of confidence, whereas his formerly domineering wife began to seriously doubt herself.

A 1997 study by Beyer and Bowden found that women are less confident about what they know relative to what can be known. Their confidence crisis becomes particularly acute when the “domain is male-oriented.”

Finance, and investing in particular, is certainly one such testosterone-rich domain. Male investment advisors outnumber female advisors by as much as 4 to 1. Male investors are more active than women investors, spending more time on security analysis, trading more, and expecting higher returns than do women. In contrast, a majority of women in a 2005 Merrill Lynch survey said they preferred to spend as little time as possible managing their investments. “Why don’t you like investing?” I’ve asked my women clients over the years. “Because,” they say, ‘it’s just way too complicated.” Never once have I heard this from a man.

But here’s a surprising fact: for all their aversion to investing, women may, in fact, be better at it than men! A University of California study in 2001 showed that women’s risk-adjusted investment returns beat men’s by an average of 1 percent as a result of their inherent caution. They trade less, require more information before they invest, and are more apt to learn from their mistakes.

Confident investing is critical to women’s financial security. Their longer lives and lower earnings means that their portfolios must work much harder than men’s. Investment success does not – contrary to what most women think – require mastery of vast amounts of technical information, but knowledge of a few basic facts:

1. Markets are fundamentally risky: no-one can know for sure how investments will perform.
2. This risk creates opportunity for higher returns. A wise investor seeks to manage this risk rather than eliminate it.
3. It’s also prudent to admit and accept that you are not smarter than the next guy or gal. This admission will lead you into investing in plain-vanilla index funds or broad-market ETFs where all you are asking for is average returns. This way, you avoid high expenses, but more importantly, above-average losses.

Ironically, knowing what you don’t know may be the smartest investing strategy of all. This awareness needs to propel more women into taking more risk, becoming more engaged and active investors, as opposed to keeping them on the sidelines. They don’t need to invest like men to succeed in this male-dominated arena. Investing like a girl will do just fine.

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Women: It’s time for the conversation about personal finance to change

Knowing what you don't know…

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