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Rewriting The Rules: Women Are Not Risk Averse. They’re Risk Aware.

Think women are more risk averse than men? Consider this myth busted. Eighty-five percent of women believe that risk-taking is beneficial when investing.

In 2015, Merrill Lynch asked 5,000 women about their investing beliefs and behavior. When asked if they believed risk was worth the chance of reaping higher returns, the answer was a resounding “yes” — 85 percent said they agreed that risk-taking is beneficial, and 81 percent said they could adapt to changing markets and investment outcomes. The study [1] 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 [2] 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 this perception of women as cautious investors “appears to perhaps be rooted more in confirmation bias than in reality.”

In other words, our assumption that women are risk averse may be skewing our perception of what is really going on.

Are Women More Risk-Averse Than Men? [3]

Think women are more risk-averse than men? Tell that to the 85% of women who believe that risk-taking is beneficial when investing. #rewritingtherules #investlikeawoman

Posted by The Humphreys Group [4] on Monday, July 29, 2019

Women Aren’t Risk Averse — They’re Risk Aware

All of these findings would seem to imply 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 co-founder and CEO 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 [5] that diversifies across asset classes, for example, and are less likely to be fully invested in equities than men.

Fortunately, these behaviors clearly put women at an advantage: We’re prioritizing diversification over trendy or unsustainable investments, which is a successful long-term strategy.

Our Risk Tolerance Increases as Our Income Increases — But This Is Not a Luxury Many Have

There’s a bigger story happening here: As our incomes increase, so does our tolerance for risk. Fifty-four percent of women who earn more than $200,000 are willing to take “a significant investment risk” to earn higher returns, compared to 32 percent of the broader population of investors. High-earning women [6] are also more likely than low-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 often comes with them.

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 [7]. This is not a luxury that most women have.

Our Advice to You

The trade-off between risk and reward is the holy grail of investing. Spend some time educating yourself about how diversification works and how investments react differently to economic, market and geopolitical news. There’s no need to read The Economist cover to cover, but you may want to start with a classic piece of investment literature, such as A Random Walk Down Wall Street by Burton Malkiel.

Consider that risk and reward go hand in hand. Work with an advisor, like the advisors at The Humphreys Group [8], 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.

And don’t apologize if you have a low tolerance for risk. We all have different prerequisites for sleeping well at night. Taking on too much risk can backfire if you make a rash investment decision in a moment of panic or stress.

We invite you to help us change the conversation around women investors and money. If you want read more about common money myths and how we can break them, download our free eBook, “Rewriting the Rules: Telling Truths About Women and Money [9].”