How Women Can Build a Sound Investing Strategy in 2020

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How Women Can Build a Sound Investing Strategy in 2020

When it comes to investing, women gain a performance edge thanks to their innate patience, low-trading frequency, and goal-driven strategies. Some writers have noted differences between women and men when it comes to money-related decisions and provide evidence that women investors exhibit marathon-like behaviors when it comes to investing: they make steady choices that will result in bigger long-term financial gains and stability, and react to setbacks with less stress and emotion that men.

Women Are Better Investors — Here’s Why

According to a 2016 Fidelity study, female investors tend to outperform male investors by an annual average of 0.4%. This doesn’t seem like much, but it accumulates to a significant financial difference. For example, let’s say a man and a woman each invest $100,000; assuming a 4.6% average annual return for the man and a 5.0% average annual return for the woman, her investment will have grown to $432,200 after 30 years, while his will be valued at only $385,400. That’s nearly a $50,000 difference and is half of the original investment!

What factors are at play here? First, men tend to buy and sell their investments more often. The same Fidelity study found that men made an average of 55% more trades in 2016 than their female counterparts. This can be financially injurious because the more an investor trades, the more he risks making an investment right before it decreases in value or selling the investment right before it gains momentum. Because women are more likely to hold on to their investments throughout market fluctuations, they capture more growth over time.

Why exactly do women hold on to their investments longer? There are a lot of reasons. As women, we usually conduct more research before investing and maintain a long-term perspective more often. We tend to view investing less as a game to be won and more as a means to accomplish goals and reach life’s milestones. And while women aren’t afraid of risk, their heightened risk awareness leads them to allocate their risk-budget prudently, which leads to better, long-term outcomes.

Finding the Right Balance in Investing

I believe it’s vital to have a disciplined investment philosophy and to follow basic best practices. For context and as an example, at The Humphreys Group, we begin by reviewing and discussing the wide world of investment objectives and strategies that are available with each of our clients — expanding their knowledge, ensuring they are informed, and ascertaining the best strategy or strategies that will work for them. Some areas we cover:

Investing 101: Remember you are buying assets for their potential to increase in value, provide income, or do both. This means you need to expect fluctuations in returns, volatility, and cycles of depreciation and appreciation; long-term goals such as retirement, buying a home, or paying for college are investments that often weather such cycles.

Stocks vs. Bonds: Stocks mean investors own shares of a company, and those shares will increase or decrease in value based on how well the company performs. Bonds are considered less risky than stocks; they are a form of a loan to a company and investors’ payoff comes in the form of company interest payments on those bonds.

Asset Allocation: Multiple factors contribute to how you should approach asset allocation. We recommend that, when making decisions about where and how much to invest, you should take into account your unique views on your risk tolerance and risk capacity levels, financial goals, financial timetables, required income, and tax considerations. It’s also important to consider the variety of external factors that have the potential to affect investments, such as: market volatility, short- and long-term risk, inflation, and purchasing power.

The balance really depends on your unique situation — What goals are you investing for? How much do you have in investable assets, outside of your standard financial picture? — tolerance for risk, and time horizon. If you are closer to retirement, for instance, it’s often best to re-allocate to more conservative investments to help protect your nest egg as you move away from a steady, 9-to-5 paycheck. If you are younger with many years standing between you and retirement, you can afford to be more aggressive with your investment strategy, as you have more years to reconcile any losses from market volatility. Enlisting the help of a qualified, credentialed financial advisor can help you feel confident that you’re making the right decisions.

Evaluating Your Financial Situation

Take time to calculate and evaluate your net worth. Understanding this figure is vital to understanding your total financial picture and determining next steps, especially when it comes to investing. The number illustrates your financial realities and can help inform your financial direction and decisions, today and well into the future. Once you understand your total financial picture and where you stand, you can take specific, actionable steps toward successfully saving, investing, and reducing debts. Routinely assessing your net worth can help you stay on a steady path toward your long-term goals.

Education is always a good place to start as well, and women already excel at doing their homework and the research needed to get smart about a topic. What’s most important is to take risk that’s appropriate for your situation. Also, consider that risk and reward go hand in hand.

Be risk-smart — think about your risk capacity (how much risk you are able to take on, given your resources, expertise, and plan) versus your risk tolerance (how emotionally comfortable you are with taking investment risk). Remember that diversification is your friend — you can reduce risk by diversifying across types of investments, investing consistently over time, and maintaining a long-term investment horizon.

Work with an advisor to develop a clear sense of the level of investment risk needed to accomplish your goals. If that level is too high for your risk tolerance, you may need to refine your goals or make other changes, such as allocating more to savings.