Why all women should be money managers

Aug. 1, 2001
According to a recent survey of 35,000 investors printed in American Banker, women outperformed men by 1.4 percent on a risk-adjusted basis.

According to a recent survey of 35,000 investors printed in American Banker, women outperformed men by 1.4 percent on a risk-adjusted basis.

In a March 2000 Gallup Poll, women placed financial issues as the most pressing personal concern in their lives — above family, health, time, stress, and equal rights. Women today have control over more personal wealth than ever before and are realizing the importance of managing their own finances and investments.

Whether single, married, or widowed, women are earning higher incomes — and are taking a more active role in managing them.

It's critical for women to prepare for their financial futures. Statistics indicate that women earn nearly 25 percent less than men, often lack pension plan coverage through work, and, on average, outlive men by seven years. More women are taking charge to save and invest for the future.

Additionally, if they're not already doing so, most women will ultimately have to manage their finances on their own. Women may find themselves managing the family budget, making decisions about investing, selecting 401(k) plan options, or dealing with a divorce settlement or an inheritance.

According to a recent article in Business Week, financial advisers suggest that 90 percent of all women will be in charge of their own finances at some point in their lives, whether due to divorce, widowhood, or because they never married at all.

The following statistics from various sources may help illustrate why women need to save early and invest wisely:

  • The average woman spends 15 percent of her career out of the workforce caring for children and parents.
  • Women with a pension typically receive half the benefits given to men — $4,200 annually, compared to $7,800 for men.
  • Approximately half of women in the United States over age 65 are widowed.
  • On average, women earned only 76 cents for every dollar that men earned overall in 1999.

Money management may be a personal activity tailored to a woman's needs, objectives, and goals. Women often have different objectives than men when it comes to finances, and they often possess unique investing and financial attitudes as well. For example, women tend to favor lower-risk investments, such as money market accounts and CDs, over higher-growth, higher-risk securities. In a recent Yankelovich study discussed in the Nov. 12, 1999, issue of Business Journal, three-fourths of women investors said they favor safe investments, even if it will result in lower returns.

While this tendency toward cautious investments can limit an investor's potential for growth, women's more measured approach to investing may benefit them in other ways. According to a recent survey of 35,000 investors printed in American Banker, women outperformed men by 1.4 percent on a risk-adjusted basis. One reason for this success may be that women generally rely on solid research before making investment decisions. They also are less likely to sell an investment because of short-term fluctuations in the market. This cautious and educated approach helps women feel more comfortable with financial management.

You can learn how to manage your finances better by attending investment workshops or a class at a local community center. Libraries also provide information on money management and investing. When it's time to implement your strategy, make sure you've considered all of your goals and have identified appropriate planning techniques. You can achieve your financial goals by establishing a sound program of systematic investing and patiently investing for the long term.

Women investors can achieve financial security in retirement. All it takes is disciplined saving and a smart investment strategy. Here are some strategies to consider:

Start investing early. The most common mistake that women make is to start retirement planning too late. The sooner you begin investing, the more time your money potentially has to grow. Even small amounts invested early can benefit from compounding over time.

Establish an investment plan. Women tend to be more goal-oriented than men and are less likely to follow 'hot" investment tips. Thus, they may be more likely to adopt a long-term investment plan and stick to it. Your plan should incorporate your investment time horizon, objectives, and risk tolerance.

Use tax-deferred savings opportunities. Tax-deferred retirement plans — such as 401(k)s, individual retirement accounts (IRAs), and other qualified retirement plans — offer the potential for significant accumulation over time. These plans enable interest and dividends earned on your investments to compound tax-deferred until you begin making withdrawals. If your office offers a qualified retirement plan, consider making the maximum allowable contribution. However, if you do not have access to a plan through your employer, consider establishing an IRA. You may also look at the benefits of a Roth IRA, which offers tax-free withdrawals if certain conditions are met.

Self-employed women and small-business owners can establish a Keogh, SEP, or SIMPLE retirement plan (consult your tax adviser to determine the best alternative for your individual situation).

Include growth investments in your plan. Studies indicate that women are more averse to risk than men, but lower-risk investments, such as bonds and money market accounts, generally don't grow as quickly as those with higher risk. Although past performance is no guarantee of future results, historically stocks have consistently outpaced both inflation and taxes. Including such growth-oriented investments in your investment portfolio may help you achieve higher returns.

Diversify. Your portfolio is subject to lower risk if it's spread among various investments, rather than concentrated in a single investment or market. Adopt an asset allocation framework for your portfolio that divides investments between various asset classes such as stocks, bonds, and cash equivalents. This prevents your portfolio from becoming overweighted in any one particular area, so that market fluctuations will have less of an effect on the overall value of your investments.

Kathleen Adams, RDH, BS, is a financial adviser with Waddell and Reed (www.waddell.com). She is currently trying to initiate money-management workshops for hygiene students and specializes in working with dental professionals. She can be reached at (800) 210-1357.