At The Humphreys Group, it’s no secret that we revere the many ways women today are breaking through gender stereotypes. Lately, we’ve been especially fascinated by stereotypes that permeate discussions about women and money. These phrases probably sound familiar: “Women aren’t interested in investing. They lack confidence about their financial decisions. When women do invest, they’re too risk averse.” By and large, these – as well as many other commonly accepted notions in finance, by the way – are all myths.
That’s why we’re going to spend the coming weeks busting myths about women and money and shining a light on the data that disproves them. We’ll also share what we’ve learned from our work with clients, and offer some thoughts on what we can all do to re-direct the conversation from myth to truth.
It probably comes as no surprise to learn that women are less likely than men to take physical risks. We participate in fewer extreme sports like sky diving and rock climbing. We engage in illicit drug use less often. And when we’re behind the wheel of a car, we’re less likely to speed, tailgate, drive drunk, and we’re more inclined to wear a seat belt. So, it’s easy to assume that we take fewer financial risks as well. The financial services industry has long labeled women as more “risk averse,” and some commentators even have the audacity to attribute this to our hormonal or biological compositions!
Consider this myth busted. Truth is, women are not as risk averse as you may think.
In 2015, Merrill Lynch asked 5,000 women about their investing beliefs and behavior. When asked if they believe risk is worth it, the answer was a resounding yes: 85% said they agree that risk taking is beneficial, and 81% said they can adapt to changing markets and investment outcomes. The firm also found that men and women who share the same level of financial knowledge exhibit the same risk behavior. Even more interesting is a 2012 meta-analysis of over 25 economic studies regarding risk tolerance differences between men and women. The researchers found that the difference between genders was negligible, and even concluded that this perception of women as cautious investors “appears to perhaps be rooted more in confirmation bias than in reality.” In other words, our expectation that women are risk averse may be skewing our perception of what is really going on.
All this would seem to imply that women have a healthy appetite for investment risk, and a lot of the time, that’s true. But unlike men, women are more mindful about what the dangers are before diving in. We take the time to evaluate whether the reward justifies the risk.
Sallie Krawcheck, former Wall Street executive and founder of Ellevest, explains this by differentiating between risk aversion and risk awareness. It’s true that women are often more aware of risk. We are more likely to be invested in an age-based allocation that diversifies across asset classes, for example, and less likely to be fully invested in equities than men. Fortunately, this clearly puts us at an advantage: we’re prioritizing diversification over trendy or unsustainable investments – a successful long-term strategy. And as you know from the first myth we busted (check our blog if you missed it https://humphreysgroup.com/financial-myth-busting-series/) our skills as investors pay off in the long term!
But there’s a bigger story happening here. As our incomes increase, so does our tolerance for risk. 54% of women who earn more than $200,000 are willing to take “a significant investment risk” to earn higher returns, compared to 32% of the broader population of investors. High earning women are also more likely than lower earning women to own more volatile investments, like commodities, hedge funds and venture capital. This makes sense, considering those with higher incomes have more resources – and the higher margin of error that comes with it.
Unfortunately, most women do not earn six figure incomes, and further still, most of us are undercompensated relative to our male peers. Therein lies the best explanation for our risk averse reputation: when we start off with less, we won’t allow ourselves to jeopardize what we’ve already saved – we have less risk capacity. The issue is not that women are wary of taking on risk; it’s that they don’t have as much to risk in the first place. Men, on the other hand, have reported taking on financial risk because they — quite correctly — feel they could easily make up for investment losses with their earnings. This is not a luxury that most women have.
In Our Experience:
- Education is always a good place to start, and women are already good at doing their homework and the research needed to get smart. What’s most important is to take risk that’s appropriate to your situation.
- 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).
- Diversification is your friend: you can reduce risk by diversifying across types of investments, by investing consistently over time and by maintaining a long-term investment horizon.
Our Advice to You:
- The tradeoff between risk and reward is the holy grail of investing. Spend some time getting smart about how diversification works, how investments react differently to economic, market and geopolitical news. No need to read The Economist cover to cover, but you may want to start with a classic, Random Walk Down Wall Street by Burton Malkiel.
- Consider that risk and reward go hand in hand. Work with an advisor to get a clear sense of the level of investment risk needed to accomplish your goals. If the risk level is too high for your risk tolerance, you may need to refine your goals or make other changes.
- Don’t apologize if you have a low tolerance for risk. We all have different prerequisites for sleeping well at night. Taking too much risk can backfire if you make a rash investment decision in a moment of panic or stress.
Ready for a deeper dive? Give us a call if you have questions or would like to talk – we’re here to help.
What’s next? Stay tuned for Myth #4: Women lack confidence about money.
 “Women and Investing: A Behavioral Finance Perspective,” Michael Liersch, Fall 2015
 “Are Women Really More Risk-Averse than Men?” Julie Nelson, University of Massachusetts, Boston, September 2012
 “Who’s the Better Investor: Men or Women?” Fidelity, May 2017
 Shortchanged: Why Women Have Less Wealth and What Can Be Done About It, Mariko Chang, 2010