Women possess more economic power than ever before. This is despite the variety of challenges they face and have had to overcome in dealing with an industry that has traditionally neglected targeting and retaining them as clients. However, this is changing as the financial industry continues to evolve to better accommodate unique needs of female investors who hold the power to fundamentally reshape the global financial and investment landscape.
What is the Gender Investing Gap?
According to a McKinsey study, women now control about a third of the total US household financial assets - more than $10 trillion, and by 2030, they are anticipated to control much of the $30 trillion in wealth possessed by Baby Boomers. This intergenerational wealth transfer is commonly referred to as the “Great Wealth Transfer” and is happening right now. Currently, women make up 47% of the workforce, almost half of all new businesses (49%) are started by female entrepreneurs, and 45% of women earn more or as much as their husbands. Despite these achievements and potential, women are less likely to participate in the markets and therefore, have less investments compared to their male counterparts. This phenomenon is known as the “Gender Investing Gap” and the price of non-participation in the stock market places women at a significant disadvantage in the long term, as they risk missing out on historic returns.
This seismic shift begs the question: why are women still lagging behind when it comes to investing? There are a number of complex reasons and it is crucial to understand the major ones:
Gender Pay Gap: Women earn less than their male peers. The latest Census data show that women earn 84 cents for every dollar earned by a man. An analysis by Pew Research Center shows this has not changed much compared to 2002, when women earned 80 cents to the dollar. These numbers are even lower for women of color. Black women make 67 cents, Latina women make 57 cents, Native and Indigenous women make 59 cents, and AAPI women make anywhere from 52 to 90 cents for every dollar made by a white man. In addition to earning less, Ellevest points out women are promoted less often than men, are denied raises more often than men, and stop getting raises a full decade earlier than men. Women, therefore, have less disposable income and invest less.
Unique Needs & Financial Considerations: Women’s approach to investing differs from that of men, as women have evolving financial needs and priorities to plan for. For starters, women live five years longer than men on average and have even longer retirements to fund. Ironically, they spend less time in the workforce compared to men because “women, whether by choice or necessity, often drop out of the workforce to raise their children. In fact, the financial hit that mothers take these years is the main reason for the overall US gender pay gap,” says David J. Craig of Columbia Magazine. Women often have to alter their financial plans due to major life changes such as divorce, widowhood, death of a family member, etc., which leaves them financially vulnerable (the average age of a woman’s first divorce is 30 and the average age of a widow is just 59). A recent Prudential survey found that women are less prepared for retirement, since they have just a third of the amount saved for retirement as men (a median $50,000 compared to $157,000). Women are also nearly three times as likely to delay retirement due to caregiving duties (first for children and later for aging parents or a sick partner), financial challenges caused by inflation, housing prices, and changes in tax policies.
Industry Standard & Confidence Gap: Traditional social norms have led women to believe that they are not good with money and that investing is a job best left for men. This combined with the financial industry sidelining women for generations, until recently, has resulted in women feeling less confident when it comes to investment decisions compared to men. This is the case even when they have a similar level of education, as per BlackRock Advisor Center. New York Life reports women feel more confident when it comes to managing day-to-day finances and less knowledgeable with long-term financial topics, only 45% of women feel confident about managing investments. As stated in a report from Transamerica Center for Retirement Studies, women are less likely to invest in an employer-sponsored plan (47%) or a brokerage account (32%) and take on less investment risk while holding too much cash on the sidelines.
It is high time women took their financial futures into their own hands instead of leaving it to chance or to their spouses. Closing the investing gap will not only benefit women’s portfolios but benefit society as a whole. A global study conducted by BNY Mellon Investment Management found that “if women invested at the same rate as men, there would be at least an extra $3.22 trillion of assets under management from private individuals today.” It also revealed that women are more likely to make investments that have positive social and environmental impacts, dedicating $1.87 trillion to responsible investments.
So How Do We Close the Gender Investing Gap?
Set Financial Goals & Start Investing: It is important to have a financial game plan before you start investing or even if you have already started investing. Are you paying down debt? Saving up for a once in a lifetime trip? Saving up to buy a house? Saving for retirement? Write it down. This will give you a clear understanding of what you are working towards. Experts recommend paying off high-interest rate debt (6% or greater) and having an emergency fund with three to six months’ worth of living expenses in an FDIC-insured, high-yield savings account before investing. Once that is squared away, start investing! You do not need a lot of money to get started. You can begin by investing small amounts of money in diversified low-cost investments on a regular basis.
Take Appropriate Levels of Risk: Nancy Tengler, author of The Women’s Guide to Successful Investing and Chief Executive Officer and Chief Investment Officer of Laffer Tengler Investments, states that “the biggest risk to women’s portfolios” is not taking enough risk. She explains women make better investors than men and are often less benchmark driven, willing to do more research, and open to changing their minds. However, women tend to hold too much cash and feel like they need to do more research before investing. While having a cash reserve is essential, holding too much cash “may rob your portfolio of the potential higher returns associated with stocks and bonds, and it could slow progress toward your goals,” notes Matthew Diczok, head of fixed income strategy at Merrill and Bank of America Private Bank.
Continue Learning: It is prudent for women to learn about the fundamentals of the markets, different investment vehicles, and risks involved. Financial literacy allows women to manage their money effectively and aids in reducing money-related stress. Financial education gives women the knowledge and skills to “handle complex financial decisions and avoid financial hazards better.” Women have a plethora of resources at their disposal. According to Stephanie Hughes, Chief Executive Officer of Wiss Private Client Advisors, information from “reputable sources such as financial institutions and certified, licensed professionals can be a great way to start.” Hughes advises caution when seeking guidance online, as there is a lot of misinformation and not every social media personality doling out advice has a financial background. Women can also work with a financial advisor who is dedicated to helping them achieve their financial goals. Per Vanguard data, working with a financial advisor not only adds peace of mind, but can also add up to or exceed 3% in net portfolio returns over time.
Although there is a lot of work to be done in order to close the Gender Investing Gap and other related gender gaps, women are becoming the new face of wealth. The wealth landscape is at an inflection point, and as a result, women not only have the power to shape their own financial futures, but also shape society in a significant way.
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