Barbara Friedberg* says women report they lack confidence in personal finance even though many are more successful investors than men.
With my experience as a multi-decade investor, professional portfolio manager and university investments instructor, I will reveal easy to implement strategies to build wealth for women (and men too).
Research by Prudential found that women worry more about risk than men.
I get it, despite investing for decades, I’m scared of risk too.
Women report that they lack confidence in finances too.
Even though in multiple studies, women are more successful investors than men.
Women, investing is so simple, once you learn the basics, you’ll wonder why you haven’t started earlier, or invested more.
So, put aside your fear, learn a few investing basics, and get started building your financial future.
Women, investing is as easy as pie
Traditional wisdom recommends looking at your total investable assets like a pie.
Put the largest piece of pie — up to 80 per cent — in stock investments and watch your portfolio surge.
Investing 101 for women
Long term, investing in stock and bond funds is a brilliant way to build wealth.
But first, know your investment history.
Broad stock market indexes have returned more than 9 per cent annually over long periods.
In fact, from 1928 to 2017, the average stock market return was 9.65 per cent.
Yet, don’t let this long-turn return fool you.
Embedded in the glorious long-term stock market returns are some horrible losing years.
From 2002 to 2011, the stock market returned 2.88 per cent, in contrast with the historical long-term average of 9.65 per cent.
And if you were savvy enough to begin investing in 1968, those dollars would have grown an annualised 10.05 per cent through 2017.
Women, here’s what this means for you.
In reality, most investors do not achieve an average annualised return over time on their long-term stock investments.
The typical investor, due to fear, greed, or a belief that she can outperform the market, will buy and sell various individual stocks and managed mutual funds.
When stocks are on a normal cyclical downturn, investors get scared, and sell.
Conversely, during cyclical stock return upswings, investors, afraid of missing the boat, buy as the markets hit a peak.
This type of behaviour leads to buying high and selling low.
According to University of California research into the “Behaviour of Individual Investors”, individual investors:
- Underperform standard benchmarks (e.g., a low-cost index fund).
- Sell winning investments while holding losing investments (the “disposition effect”).
- Are heavily influenced by limited attention and past return performance in their purchase decisions.
- Engage in naive reinforcement learning by repeating past behaviours that coincided with pleasure while avoiding past behaviours that generated pain.
- Tend to hold undiversified stock portfolios.
These behaviours damage your long-term net worth.
So, although over long periods investments averaged over 9 per cent annually, most investors do not achieve those same returns.
How to combat investment underperformance
The research is abundantly clear that it is extremely difficult to beat the returns of the overall market.
Even exceptional mutual fund managers who outperform the major stock market indexes before expenses fail to surpass their benchmark indexes when expenses are factored in.
Sure, there are exceptions: Warren Buffett, Peter Lynch, and George Soros are extraordinary investors.
Chances are, you’re not one of them.
Plus, there are excellent women investors as well!
In reality, the majority of highly compensated managed mutual fund managers fail to outperform their market benchmarks.
So, if most investors fail to outperform the simple stock market indexes, what should women investors do?
The best personal investment strategy for women (and men too)
Women, here’s how to win at investing:
- Invest for the long term
If you cannot leave your money in a stock index fund for at least eight–10 years, do not invest.
Markets are volatile and over the short term, your returns are random.
Over the long term if you believe local and global companies will grow and prosper, then their underlying stocks will advance as well.
- Cut investment expenses to the bone
Realise that investment expenses are taken off the top.
If you invest in a managed mutual fund charging 1 per cent per year, then out of every $1,000 you invest, only $990 is going towards building wealth.
And that’s not just in year one, that’s every year 1 per cent is taken out.
Thus, if the fund loses 3 per cent one year, you lose 4 per cent.
Go with the lowest expense mutual fund or Exchange Traded Fund (ETF) you can find.
Less money toward annual management fees means more money in your pocket.
- Don’t fight the market
Accept the fact that it is highly unlikely that you will beat the market, so choose highly diversified low fee investment funds for your portfolio.
- Choose your asset allocation carefully
Divide your investment pie among stock index mutual funds or ETFs, and fixed income investments like bonds and cash.
Plan your investment pie according to how much risk or volatility you can stomach.
If you don’t like the ups and downs in value of stock investments then place a smaller percentage in those types of investments.
Be aware that the opportunity for greater returns comes from taking on more risk.
And more risk means a larger part of your pie invested in stock investments.
- Stick with your plan through market downturns
No one has a problem when their investment values surge.
The problem comes when fear kicks in and you get scared during market downturns.
I know more than a few folks who let fear get the best of them and sold during market downturns only to miss the subsequent rebound.
If you sell during a market downturn, you have to be right twice, once when you sell and another time when you buy back in.
Realise that fear is normal.
But, don’t let your apprehension stop you from wealth building.
Start investing today to take care of your financial tomorrow.
* Barbara Friedberg is the owner of an investing and wealth building website. She tweets at @barbfriedberg.
This article first appeared at barbarafriedbergpersonalfinance.com.
