All of us want to earn more on our investments. But many women, if we are really honest with ourselves, are nervous about investing because we are afraid of losing money. In most things in life, women are more risk-averse than men, and investing is no exception. It causes them to compound the already well-known gender wage gap, into an even bigger one. We invest fewer dollars overall and invest less aggressively. The best way to get more comfortable with investing is by better understanding investment risk.
The Facts: Women and Investing
A study of women and finances by Fidelity Investments indicates 92% of women are eager to learn more about financial planning and investing. However, actually talking about money? We don't like to do that... with anyone. Not even our partners, friends, and more than half don't feel confident enough to talk about it alone with a financial professional. While 70-80% feel confident budgeting and managing the family finances, only 28% feel confident enough to choose the right financial investments.
A separate study of Women & Financial Wellness by Merrill Lynch produced similar findings. While women feel nearly equivalent levels of confidence to men when it comes to paying bills, budgeting, paying off debt and even choosing insurance, there is a much wider confidence gap when it comes to managing investments.
The same study found women's #1 financial regret is not investing more of their money.
Why do women invest less?
Women invest less primarily due to a lack of confidence. We choose to invest a smaller percentage of our income, and of the income we do invest, we choose to invest more conservatively than our male counterparts.
Why? Risk-aversion. Countless studies show women to be more risk-averse than men, across many facets of life, investing included. One of my favorite podcasts, Building a StoryBrand with Donald Miller, recently did an interview with Science Mike about how our brains are hard-wired to pay attention to the negative. Our primitive brain still responds to risks the way our cave people ancestors did - we prioritize resource preservation over the opportunity to increase our assets. This means we are more concerned about the risk of losing $100, than missing out on the opportunity to invest and earn multiples of that. And women tend to be more pessimistic about the potential for gains.
But When Women DO Invest, We Outperform
Now for the good news... when women do invest, multiple studies show we outperform men. This is mostly because we take longer to make our investment decisions and trade less often, while men are more likely to be more impulsive and trade more frequently.
Now, we just need to get more women investing! Here are some long-term stock market statistics to boost your confidence.
Understanding Investment Risk
There are many different facets of risk when it comes to investing. But at the simplest, highest level, let's look at the long-term performance of the S&P 500 to better frame your risk of loss when investing in the stock market as a whole.
From 1927 to 2018, the S&P 500 has generated a total annualized return of 9.5%. What does that actually mean? It means that taking into account both the rise in the price of the market and dividends received, if you drew a line from where the market was on December 31, 1927 to where it ended up on December 31, 2018, and you earned the same return every single year in between, you would have earned 9.5% annually. This is known as the geometric or compound annual return.
The market, of course, does not behave that way... the annual returns look like this, swinging up and down from year to year, which is what makes us fear losing our money. The arithmetic average annual return over the same time horizon was 11.4% with 19.6% annual volatility. If you can remember back to high school statistics, volatility is just the standard deviation of annual returns. So in any given year, most returns will fall around 11.4%, the average, plus or minus 19.6%... with some outliers.
When you focus on this roller coaster, it's no wonder we women are nervous about putting our money into investments. But it's important to remember we are not investing for the next year. We invest to invest for the long-term... for our kid's college funds post high school, for our own retirement in a few decades.
So let's look at this same period with 10-year rolling annualized returns. Look where that 0% line falls on the return axis. From 1927 through 2008, there are only 5 years where the 10-year annualized return was below zero... with the greatest annualized losses being -1.7% in 1938, following the Great Depression. Compare these few periods of small long-term annualized losses to the long-term annualized return of 9.5%.
Please note: Historical investment returns are no indication of future investment performance. I am not a registered investment advisor, and am not licensed to make investment recommendations. Any investment actions you take as a result of this post are at your own risk.
Does the reward seem better than the risk now? Do you feel more confident about investing? We will cover more types of investment risks in the weeks to come. But don't lose sight of the big, long-term picture here.
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