How Women Approach Risk in Financial Planning
How do you feel when you hear the phrase “investment risk?” Are you excited by the possibility of gains or apprehensive at the thought of losses? These are just a few of the questions an experienced financial advisor may ask before creating your financial plan.
Your attitude toward risk is vital to crafting a financial plan that meets your goals without undue stress along the way. However, the conversation surrounding risk is often different for men and women. This begs the questions – how do women approach investment risk differently, and how do those attitudes impact their financial plans?
Women Tend to Be Less Comfortable with Investment Risk Than Men
A 2019 study published in the Journal of Economic Behavior & Organization was one in a long string of research showing that women tend to be more “risk averse” than men – meaning they are less comfortable with the idea of losing money. The results spanned age, employment status, and other key demographic differentiators.
Why do women have a lower tolerance for investment risk?
There are several possible explanations for why women prefer lower risk in their investment portfolios. One commonly referenced possibility is that investments are more important to women’s financial success because of:
- Longer lifespan and retirement. Women tend to live an average of 5 – 6 years longer than men but retire earlier. These facts mean their savings must last longer.
- Lower income and retirement savings. On average, women earn 17.7% less than men and are more likely to leave the workforce to care for children or other family members. Lower earnings and shorter employment histories tend to translate to lower retirement savings.
- Lower Social Security income. While the calculation of Social Security benefits is gender-neutral, women tend to have lower benefits due to lower wages and shorter employment histories. When Social Security benefits are lower, women’s investments must make up the difference.
Previous research has also shown that women are less optimistic about potential investment gains and more pessimistic about losses than men. This perception can cause women to view the same asset as riskier than men. In turn, the tendency to view assets as higher risk can influence the types of investments women choose.
Why is risk tolerance important in financial planning?
A successful financial plan is one that helps you meet your goals and minimizes your financial stress. Both outcomes are influenced by the amount of risk you are comfortable taking with your investments.
The amount of investment risk you are willing to accept influences the types of investments you hold and, therefore, your potential gains. Second, it determines your comfort with a particular investment strategy.
A Lower Appetite for Risk Impacts Financial Planning for Women
Low risk may sound like the perfect scenario for your retirement savings. After all, no one wants to lose their hard-earned money. However, low-risk investments tend to come with tradeoffs – such as low expected returns and more money out of pocket to reach savings goals.
Low Risk Investments Tend to Yield Low Returns
Investments with virtually no risk of loss – like savings accounts, CDs, and money market mutual funds – tend to pay a small amount of interest. On the other hand, investments with more risk – such as stocks – generally have higher potential for gains that can help your savings grow more quickly.
To illustrate, consider this simplified example. A woman with a moderately-low risk tolerance and a man with a moderately-high risk tolerance each had $10,000 to invest ten years ago. The woman chose to invest in Treasury Bills – generally considered a very safe investment option – and her investment is now worth about $11,600 based on the returns of the S&P Treasury Bill Index. On the other hand, the man invested the same amount in large-capitalization stocks and his investment is now worth about $27,500 based on the returns of the S&P 500.
In this example, a higher-risk investment yielded higher returns, but there were many times throughout the past decade where the man’s portfolio would have shown losses. In turn, the woman’s investment portfolio would have avoided drastic changes in value but yielded lower returns at the end of the timeframe.
Low Risk Investments Often Require More Saving
As the previous example showed, a portfolio of low-risk investments can require you to save more out of pocket to achieve the same result. The additional savings required to meet your goals can put a strain on your monthly budget during your saving years or require you to make sacrifices during retirement. Both outcomes can create additional stress over your finances.
To be clear, you should not accept more risk than you are comfortable taking. Instead, it is important to work with a financial advisor who focuses on coaching, teaching, and mentoring clients.
The right advisor will help you understand your relationship with investment risk and how it could impact your financial plan. Together, you can set a course for the future that strikes a balance between reaching your financial goals and making you feel comfortable in your financial situation.
Financial Fingerprint™ From Brookstone Wealth Management: A Financial Plan Built Around You
At Brookstone Wealth Management, we start by understanding your relationship with money and your personal tolerance for risk. Then, we build a portfolio and a plan to help you achieve your retirement goals without undue stress. We do this because we believe your financial plan should make you more comfortable with your finances, not less.
Our comprehensive wealth management program, Financial Fingerprint™, brings together the most important aspects of your financial life into one easy to understand plan. Best of all, this nimble plan is backed by your dedicated advisor who puts you at the center of every decision.
Contact us today to learn more about Financial Fingerprint™ and how we can help you achieve Financial Navigation Made Simple.
