Investing advice often starts with the assumption that women need to be coaxed into understanding finance. The belief that women are risk-averse spendthrifts permeates everything from media that discourages women from excessive shopping to financial advisors who assume their female clients want less control over their investments.
But research doesn’t bear these stereotypes out. In fact, women investors consistently outperform their male counterparts, which could leave them with hundreds of thousands of dollars more at retirement, according to Fidelity.
Understanding how women invest and why they excel can help everyone, regardless of gender, do a better job with their investments.
Research, Risk Aversion and Self-Control
Studies show that women spend more time researching their investment choices. And while they do take on less risk than men when it comes to investing, that doesn’t mean they’re risk averse. Rather, they’re simply more likely to take on appropriate levels of risk with their investments than men. Both of these findings make for better investing outcomes.
“This prevents women from chasing ‘hot’ tips and trading on whims, behavior that tends to weaken men’s portfolios,” says Marissa Greco, a financial planner at Greco-Nader Wealth Navigation. And because women are more likely to have good age-based asset allocations, they achieve proper diversification to help protect their money, regardless of market condition, according to Fidelity research.
This may help women with another investing best practice: holding investments for the long term. “Women are apt to stay calmer than men in down markets,” says Greco. This protects them from locking in losses when the market takes a momentary tumble. What’s more, “men trade 45% more often than women do, and although men are more confident investors, they tend to be overconfident,” says Greco. “By trading more often, and without enough research, men reduce their net returns.”
These lower net returns aren’t just from poorer investment performance, though. Trading may result in extra commissions and higher taxes on their investments.
“Stocks or funds that are sold after less than a year are taxed at a short-term capital gains rate, which is typically higher than the long-term capital gains rate you’d pay if you hold onto a stock or fund for more than a year before selling it,” says Jennifer Barrett, author of “Think Like a Breadwinner” and chief education officer at Acorns.
These higher trading costs might not be an issue if you managed to consistently buy outperforming assets, but the average investor is unlikely to pick winners most of the time. It’s well known that passive index funds outperform funds that are actively managed by professional stockbrokers, and Fidelity’s research found that men underperformed women by almost a half a percentage point each year, which can add up to huge losses over an investing lifetime.
Use Systems to Invest Like a Woman
No matter your gender, you can recreate these positive investing characteristics by following some simple guidelines.
Whether you’re picking stocks for a taxable investment account or choosing an asset allocation for your 401(k), start by outlining rules that dictate when and why you would buy and sell a given investment. Setting parameters ahead of time ensures you navigate the market deliberately, rather than reacting to the latest whims of financial news.
For example, you might opt for automated investing using a strategy like dollar-cost averaging. With dollar-cost averaging, you invest fixed amounts at a regular cadence—say $100 every month in an S&P 500 index fund—rather than trying to buy in all at once at a low price.
Over the long term, this may actually help you buy more shares for a lower average price, without the stress of trying to time the market. Regardless of exact purchase price, though, it ensures you stay off the investing sidelines and get your money in the market.
This is particularly important for long-term goals, like retirement, because it encourages action, not waiting for a perfect moment. While we don’t know how high or low prices might be in the short term, we do know there’s a very good chance prices in the near term will be substantially lower than they will be in 10 years, 20 years or when you retire.
Overcoming the Gender Income Gap
Despite research finding women outperform men when it comes to investing, some women are still hesitant about investing. This may at least in part be because thanks to the gender income gap, women simply have less free money to invest. Depending on race and ethnicity, this gap can leave women with 55% to 90% of what men earn, which obviously greatly hinders women’s abilities to invest.
While this systemic obstacle cannot be fixed by individuals, Barrett would like to see more women thinking of themselves as breadwinners to help ameliorate these wage and wealth gaps.
“If we see our financial contributions as being less important, or if we assume that a partner will take the lead in earning and investing for the future, there’s less urgency to go after that higher paying job or to start investing now to build our own wealth,” she explains. “We need to be building our own wealth. And that means investing early and regularly—and not just for retirement.”
Getting started with investing can be hard, though, due to the opacity of the financial industry, Greco says.
“The industry has done a poor job of explaining what investment risks could be,” she says. “When women truly don’t understand investment risk, they do less with their money. They keep it in savings accounts.” This, of course, has risks of its own as money kept in savings accounts earns such low returns that it can’t preserve purchasing power over time due to inflation. Money put in the market, on the other hand, can beat inflation and substantially grow assets over time.
So how can newbies overcome their hesitancy and start benefiting from the wealth-making potential of the market?
Greco advises such investors to start investing wherever you are, whether that’s $1, $100, or $1,000 a month. “You need to create habits of paying yourself regularly,” says Greco. “Remain calm and steadfast. Stay patient rather than impulsive and reap the long-term gains.”