Investing can be overwhelming.......
It consists of a specific and technical language. It exists within a 24 x 7 news cycle of events, far beyond any one person’s control, often with direct impact on your financial well-being. Behavioral economists, including the two recent Nobel Prize winners, teach us that topics outside of our control tend to make us more nervous. We tune them out.
For a lot of women, investing and financial management falls into this category. What we’ve observed from the buzzing, booming media is that investing is “complicated,” not for the faint-at-heart, filled with fear, uncertainty and doubt, requiring significant time and energy to “make sense” in order to “take action” on its opportunities with any degree of success. This constant media buzz hardly helps.
So, why should women care? The answer lies in the numbers 7 and 9. Women in the United States on average live 7 years longer than men. And 9 out of 10 women, at some point in their lives, will be solely responsible for their financial security – with all of the attendant responsibilities. These statistics make the case, pointedly, that women need to be just as financially literate as men to ensure a lifetime of financial security. Perhaps more so.
How do women start to become financially literate? First, recognize that the apparent complexity of investment profiles and products is just that – apparent, rather than real. Second, recognize that simple pragmatic steps can be taken to make sense of your investment options in a way that allows you to take control of these critical financial decisions.
We believe that getting started on these two steps starts with a basic framework consisting of two elements:
- Understanding the different types of asset classes and investment options.
- Gaining a clear understanding of what you need (e.g., income? for how long?), when you need it, and which of the different asset classes are appropriate for your situation.
The different asset classes, including cash, stocks, bonds, and commodities, to name a few, have historically shown different risk/return profiles. So, we would encourage you to think of your portfolio as consisting of different types of assets, that you want to use in different proportions at different points of time in your life, each with differing risk/return profiles. So far so good.
Now for the behavioral side of this pragmatic model – which consists of three parts: life-stages, income level and risk tolerance. First, the reality is that we all go through different life stages and our roles within these stages change. We are professionals, partners/spouses, parents, siblings, care-givers, friends – often in complex combinations of these roles. Second, based on our roles and life-stages, our income levels vary, not only in terms of dollars earned, but also the objectives towards which those dollars need to be spent. How many of you have children attending school, moving back home or getting married? Parents who need care? Job loss? Friends who need assistance? These different roles carry with them different financial implications that you need to figure out how to meet and manage.
Finally, we all have different risk tolerances – in terms of how much volatility we can stomach, and how much income we need, again based on our often competing roles. Former Nobel Prize winners in economics demonstrated that people (and here men and women were similar) felt greater “pain” for amounts lost than for amounts earned, even if the loss was far less than what was gained. Statistics show that women have a lower risk tolerance than do men. But the pragmatic reality is that what constitutes ‘risk tolerance’ depends upon the roles, income levels and life stages in which we find ourselves.
It is your unique combination of life-stage and roles, your income and risk tolerance, that affect what investments to make, when to do so, and how to manage your portfolio as your life-stages evolve. Keeping the topic of financial planning simple, and pragmatic, is critical – and doing so as suggested above can help to make it a tangible part of your everyday life. For women, this pragmatic approach to creating a diversified investment portfolio can make those life changing numbers of 7 and 9 much more manageable.
We welcome your contacting us for a complimentary consultation about the challenges outlined in this article, or for any other financial advisory questions.
The information provided above is general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.
Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:
Laurie Gerber, Client Development
GW & Wade, LLC