“What you risk reveals what you value” – Jeanette Winterson
Risk, as defined by Merriam-Webster.com, is the possibility of loss or injury, or the chance that an investment will lose value. As noted in the CFA Institute Journal Review, it is widely accepted and documented that men generally have a higher tolerance for risk compared to women. This is most definitely not the case for everyone. You can look to people like Danica Patrick who has broken gender norms and world records in the male-dominated, thrilling (or for some – panic inducing) industry of professional car racing. There are certainly several other examples. So, it isn’t as easy as saying that women are simply more risk-averse or that it comes down to personality and inherited traits. As Cordelia Fine noted in her book, Testosterone Rex, only 14% of skydivers are women, yet women are 20 times more likely to die from childbirth in the United States. For the sake of humanity, thankfully that is a risk women ARE willing to take. In reality, women think differently as to what risks they are willing to take in some areas of life and feel they are forced to make choices that are inherently less risky in other areas.
Science Daily.com points out that women are more likely to outlive their male partners, which suggests that women may need to rely on their investments for longer periods. A major component of not outliving one’s money is to ensure an adequate growth rate, which implies taking a certain amount of necessary risk over a long investment time horizon. Unfortunately, women are less likely to take the required amount of risk in order to achieve that goal. Through setting sound investment goals that marry one’s ability to assume risk with their willingness to accept risk, one can overcome an unhealthy aversion to investment risk. A goals-based approach to investing puts less emphasis on return and risk as isolated constructs, and more emphasis on the appropriate combination that is required to achieve a goal over a specified period of time. Setting one’s sights on the outcome of clearly defined goals, helps prevent an investor from falling prey to preconceived notions of risk and return over the short-term and are less likely to make reckless, impulsive decisions at inopportune times. Staying the course is an important element in realizing one’s investment goals.
Staying the course is actually something that women have shown they are really good at. It is one of the positive outcomes of being more cautious in their decision making. In his book, The Laws of Wealth, Daniel Crosby references a study {Terrance Odean and Brad Barber} that looked at all the accounts of a major discount brokerage and discovered that the average man traded in their accounts 45% more than the average woman; single men traded 67% more than their female counterparts. This can be attributed to overconfidence bias and the propensity for men to be more risk seeking in their investing. The higher frequency of trading by men was shown to consistently erode returns over time. The average man underperformed the average woman by 1.4% per year; single men lagged single women by 2.3% per year. Compounded over a lifetime, the higher frequency trading could have a significant negative impact on one’s overall wealth. Patience is one of the well-known virtues of investing and it seems women have that in abundance.
Investor education is also often cited for differences in investor risk tolerance between men and women. It is not surprising to learn that the investment industry is still largely male dominated. As Noelle Boughton pointed out in a recent article on WealthProfessional.ca, only 23% of investment advisors are women. Whether it be from lack of encouragement for women to pursue investment careers or due to what role she plays outside of work, it is not uncommon for women to feel less confident in their investment knowledge. This can lead to an unreasonably low risk tolerance and potentially lower returns over time.
According to The Journal of Economic Psychology, several studies have shown that female investors, when advised by an investment professional, are more likely to feel comfortable accepting an appropriate level of risk than if they were directing their own investments. This can be attributed to an adviser’s ability to bridge the investment knowledge gap, exercising their fiduciary duty, and helping set achievable investment goals through financial planning. This is especially helpful when a woman finds herself all of a sudden in the position to make all the financial decisions for the household, when before that simply was not the role she played.
We at QV are a diverse team of investment professionals and are proud to be able to offer goals-based investing to all of our clients. We also are committed to providing periodic investor insights on various investment topics. Through doing so, we hope to build client confidence. We encourage you to contact QV’s Wealth Management Team if you would be interested in discussing your investment goals.
