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Investment advice often assumes that women need to be encouraged to understand finance. The belief that women are risk-averse spenders permeates everything from the media that discourages women from over-buying to financial advisers who assume their clients want less control over their investments.
But research does not confirm these stereotypes. Indeed, women investors constantly outperform their male counterparts, which could leave them hundreds of thousands of dollars more in retirement, according to Fidelity.
Understanding how women invest and why they excel can help everyone, regardless of gender, manage their investments better.
Research, risk aversion and self-control
Studies show that women spend more time researching their investment choices. And while they take less risk than men when it comes to investing, that doesn’t mean they are risk averse. On the contrary, they are simply more likely to take appropriate levels of risk with their investments than men. These two findings lead to better investment results.
“This prevents women from chasing after good deals and negotiating on whims, behavior that tends to weaken men’s portfolios,” says Marissa Greco, financial planner at Greco-Nader Wealth Navigation. And because women are more likely to have a good asset allocations, they get a good diversification to help protect their money, whatever the market situation, according to Loyalty research.
This can help women with another best investing practice: holding long-term investments. “Women tend to be quieter than men in declining markets,” Greco explains. This protects them from locking in losses when the market experiences a momentary drop. Additionally, “men trade 45% more often than women, and although men are more confident investors, they tend to be overconfident,” Greco explains. “By trading more often and without enough research, men reduce their bottom line.”
However, these lower net returns are not just attributable to poorer investment results. Trading can result in additional commissions and higher taxes on their investments.
“Shares or funds sold after less than a year are taxed in the short term. capital gains rate, which is typically higher than the long-term capital gains rate you would pay if you held a stock or fund for more than a year before selling it, ”says Jennifer Barrett, author of“ Think Like a Breadwinner »And responsible for training. officer at Acorns.
These higher transaction costs might not be a problem if you manage to consistently buy outperforming assets, but the average investor is unlikely to pick the winners most of the time. It is well known that passive index funds outperform actively managed funds by professional stock brokers, and Fidelity’s research found that men underperform women by nearly half a percentage point each year, which can lead to huge losses over a lifetime. ‘investment.
Using systems to invest like a woman
Regardless of your gender, you can recreate these positive investing characteristics by following a few simple guidelines.
Whether you choose stocks for a taxable investment account or by choosing one asset allocation for your 401 (k), start by describing the rules that dictate when and why you want to buy and sell a given investment. Setting parameters in advance allows you to deliberately navigate the market, rather than reacting to the latest whims of financial news.
For example, you can go for automated investing using a strategy such as average purchase. With the cost averaging in dollars, you invest fixed amounts at a steady rate, say $ 100 each month in a S&P 500 index fund, rather than trying to buy it all all at once at a low price.
In the long run, it can actually help you buy more stocks at a lower average price, without having to try to time the market. Regardless of the exact purchase price, however, it ensures that you stay away from investments and get your money in the market.
This is especially important for long-term goals, like retirement, as it encourages action, without waiting for the perfect moment. While we don’t know how high or low the prices could be in the short term, we do know that there is a good chance that the prices in the short term will be significantly lower than they will be in 10 years, 20 years or when you retire.
Overcoming the gender income gap
Despite research showing that women outperform men when it comes to investing, some women are still hesitant to invest. This may at least in part be due to the fact that, thanks to the gender income gap, women simply have less free money to invest. Depending on race and ethnicity, this gap can leave women 55 to 90% of what men earn, which obviously greatly hinders women’s ability to invest.
While this systemic barrier cannot be resolved by individuals, Barrett would like to see more women see themselves as the breadwinner to help narrow these wage and wealth gaps.
“If we consider our financial contributions to be less important, or if we assume that a partner will take the initiative to earn and invest for the future, there is less urgency to seek that higher paying job or to start investing. now to build our own wealth, ”she explains. “We have to build our own wealth. And that means investing early and regularly, and not just for retirement. “
Starting to invest can be difficult, however, due to the opacity of the financial sector, Greco says.
“The industry has poorly explained what the investment risks might be,” she said. “When women really don’t understand the risk of investing, they make less with their money. They keep it savings accounts. “This, of course, comes with its own risks, as money kept in savings accounts generates such low returns that it cannot preserve purchasing power over time due to inflation. Money put on the market, on the other hand, can beat inflation and increase assets dramatically over time.
So how can newbies overcome their hesitation and start taking advantage of the wealth-building potential of the market?
Greco advises these investors to start investing wherever you are, be it $ 1, $ 100 or $ 1,000 per month. “You have to create regular payment habits,” Greco explains. “Stay calm and firm. Stay patient rather than impulsive and reap the long-term gains.