New trading platforms and services have made investing more accessible and user-friendly than ever before. But many women continue to report feeling intimidated by and hesitant to enter financial markets. Low female investment confidence and participation have long been observed, including in several recent analyses. In a widely cited 2021 Fidelity Investments study, only 33% of women reported feeling confident in their ability to make investment decisions.
Around the same percentage (31%) of women felt confident planning their retirement finances, and an even more meager 19% felt sure of their ability to select investments that aligned with their financial goals. Research conducted by Zurich-based investment company Inyova found, similarly, that investment confidence and participation were lower among Swiss women: 42% of respondents had never made investments: 36% reported not knowing where to start, 33% that they were scared of losing money, and 28% that they found the topic too complex and difficult. This lack of confidence takes its toll, in the long and short run. At least one night a month, according to Fidelity, 34% of women stay up worrying about their financial situation.
You or a woman you know — your mother, sister, aunt, or friend — may feel daunted by and reluctant to enter the world of investment. Surprisingly, however, the same qualities and behaviors that have traditionally kept women out of financial markets make them especially responsible and profitable investors when they do invest. In this article, we’ll help you, your friend, or your loved one overcome investment trepidation, and get moving on the road to financial control and future security.
Why women should Invest, and how to get started
Like trees, investments take time to grow. This fact is especially relevant to women investors. Women on average make less money and live longer than men. In Switzerland specifically, women earn 11 percent less than men. They also live about 4 years longer than Swiss men. This means they have less income available for investment, and it has to support them for longer when they retire. Fortunately, by investing early, women can harness the power of time and compound interest to grow their investments into the larger nest egg they need.
Compound Interest and Dollar Cost Averaging
Compound interest — or “interest on interest” — is key to understanding the power of time when making investments. Let’s say your initial investment, or principal, is €10,000, and earns interest at 8%, paid out at the end of a set period, say, a year. If you keep (reinvest) the first year’s interest (€800) in your investment, that new compounded amount (€10,800) will earn interest the following year (€10,800 x 8% = €11,664), and so on. After just 9 years of compounded 8% interest, an initial investment of €10,000 will double to €19,990.05. Compound interest makes time your ally. Fidelity Investments reports that 69% of women regret not starting to invest their extra savings earlier. The sooner you invest, the longer you can compound and increase your investment returns.
Investing sooner is financially prudent. Okay. But what if you’re worried that the price of your investment might come down after you buy it? Should you wait for the market to change to start investing?
No. In fact, the best time to start investing is now. The sooner you start investing, the sooner your investment returns will start accruing and compounding. The longer you wait, the higher the cost in lost returns. To mitigate the risk of buying at the “wrong” time, you can make regular small investments over time, a strategy called dollar cost averaging. Over time, investment purchases made when prices are high will balance out against investment purchases made when prices are low. This strategy is used by nearly all successful investors, from the largest funds down to the smallest individual account holders. Dollar cost averaging can provide the reassurance you need to get started — and continue — investing, so you can take advantage of compound interest sooner, for longer.
“The best time to plant a tree was 20 years ago. The second best time is now.” — Chinese Proverb
Smart investors diversify
Most investors start off with stocks and bonds. They’re easy to understand and control, and widely available.
A stock is a share of ownership (or “equity”) in a publicly listed company. The stock price moves up and down according to its supply and demand on the stock market. Stock owners receive dividend (company earnings) payments, can vote at stockholder meetings, and also sell their stock (or buy more) anytime the market is open.
Bonds (or “securities”), on the other hand, are money you, the investor, loan to a company or government for a fixed term. In return, you receive interest payments at agreed-upon intervals, and are paid back your principal investment at the end of the bond’s term (maturation period). Bond prices are more stable than stock prices; they react less to market fluctuations. But bonds are more affected by interest rate changes, and in the long run don’t perform as well as stocks.
Investing in bonds is generally less risky than investing in stocks. Still, investing in a single bond or stock is more risky than diversifying and investing in several bonds or stocks at the same time. Rewards of non-diversified investments can be big. But even professional investors get it wrong, and can lose big on single stock or bond investments. Especially stocks.
The safest, most reliable investment strategy, therefore, is diversification — investing in a basket of different types of stocks, bonds, and other asset classes whose values do not move up and down together (are not positively correlated). Over time, the poor performance of one or more asset classes can be offset by the good performance of others in your basket.
From risk-averse to risk-responsible: the strengths of women investors
While women are on average more cautious about investing, being cautious, it turns out, makes women better investors than men. The 2021 Fidelity Investments study cited above found that — even though only 9% of respondents thought women were better investors than men — women, over a 10-year period, earned 0.4% more investment income than their male counterparts. Research conducted at Warwick Business School uncovered even more impressive performance differences; over a three-year period on the FTSE100, women achieved 1.8% better returns than men. Over time, differences like these add up. A Hargreaves Lansdown study, which reported 0.81% better three-year returns to women investors, observed that similar returns over a 30-year period would result in a portfolio worth 25% more than the average male investor’s.
It appears that the very same qualities and behavior that have tended to hinder women from investing are precisely what make them better investors when they turn their hands to it:
- Women are more cautious than male investors: Women tend to invest more in diversified funds, and avoid the volatility that often attracts overconfident men. While women may miss out on some windfalls, they also avoid trading disasters, making them on average better investors.
- Women seek out and rely on the advice of an investment professional more often than men do.
- Women are more disciplined: They are more likely than men to develop a financial plan and stick to it.
- Women trade less aggressively; they make trades less frequently than men: This results in fewer realized losses, better overall returns, and lower transaction costs.
Risk-aversion and a male-dominated investment culture have tended to discourage female investment activity. Women have been more likely to hold cash investments. Currencies, especially the Swiss Franc, are indeed a highly stable investment class. But even the most stable currency’s value is constantly eroded by inflation. Compared with a more diverse basket of investments, cash investments in the long run actually reduce financial security.
But the tide is turning. More and younger women are making their risk-aversion work to their advantage — as “risk-responsible” investors. They are increasingly knowledgeable about and active in financial markets. As they come to understand the advantages of diversified, long term investment, the cautiousness that used to keep women’s money primarily in savings accounts now makes them prudent investors, adept at achieving the financial freedom and future security they want for themselves.
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