Women and money: What I wish I knew at 25 about investing

There is a gender gap in personal finance: women invest less than men. But when they do, they may outperform men.

I turn 55 this year, and the topic of investment and retirement has been much on my mind, with schoolmates discussing what to do and how to maximise our savings.

March 8 being International Women’s Day, I have decided to highlight this issue of women and money, to remind women – and those who love them – of the importance of managing their own finances.

Having made some costly mistakes, I wish I knew what I do now about investing at 25.

“ Too many women don’t invest at all, from fear, or from succumbing to stereotypes; or they leave it to the men in their lives. ”

Lesson 1: Get over learnt helplessness over money

Many women have a certain mental block over investing. I know I did.

When I speak to my female friends about investing, I come across two types of responses. Some of my single friends want to know more, or are active investors themselves. Another group of my married friends, say they don’t invest, or do much about investing, because their husbands manage the big money in the household. (As opposed to the household budget, which is small money, and usually managed by the woman.)

A woman may be well-educated, have a successful career and manage the household budget meticulously. But when it comes to managing investments, she may revert to timidity.

Behavioural money coach Natasha Janssens, who runs the Women with Cents website in Australia, argued that women must overcome the “learnt helplessness” that leads many women to leave their financial futures in other people’s hands. Learnt helplessness suggests people exposed to repeated events believe they are inept at something and give up trying.

“In essence, women have been conned into believing two major lies,” Ms Janssens points out.

“The first, that we aren’t good with money and the second, that we have more important things to do than look after our money. Neither could be further from the truth.”

Another gender gap in investing flies against conventional thinking.

On the one hand, women tend to earn less and have less available for investment compared with men. Women globally also have poorer retirement adequacy, because many leave the workforce to raise children.

But on the other hand, when they do invest, women end up doing better than men. This is the result of a large-scale survey by Boston-based mutual fund company Fidelity. It tracked 5.2 million customer accounts, from 2011 to 2020, and found that “female customers earned, on average, 0.4 percentage point more annually than their male counterparts.”

“That may not seem like a lot, but over a few decades it can add up to tens of thousands of dollars or more,” The New York Times article reporting on this noted.

The study also delved into one possible explanation: women traded stocks or funds half as often as men. Trading too much – unless you are a trader – is in general considered very bad for your portfolio.

As the NYT article went on: “In a now classic paper that appeared in The Journal of Finance in 2000, titled Trading Is Hazardous To Your Wealth, two professors, Brad M. Barber and Terrance Odean, proved just that. From 1991 to 1996, individual investors who traded the most earned an annual return that was 6.5 percentage points worse than the overall performance of the stock market.

“The following year, the two professors tackled trading and gender in a different paper called Boys Will Be Boys. Sure, women traded more than they should too, and from 1991 to 1997, their trading reduced their net returns by 1.72 percentage points per year. But the even more frequent buying and selling men engaged in caused them to take a 2.65 percentage point hit – more than twice the male underperformance that Fidelity found years later.”

As the above summary of recent research suggests, women are not at all bad at investing as a gender, compared with men. Some can make poor decisions. Some make good decisions. But we all make mistakes and we learn. We can also find help. The trouble is, too many women don’t invest at all, from fear, or from succumbing to stereotypes; or they leave it to the men in their lives.

Lesson 2: Don’t be taken in by fads

It is natural, when you are in your 20s, to get excited about new trends and to feel that you understand them in a way older generations don’t. For my generation, it was the dot.com boom, when we were buoyed by the possibilities of the early digital world.

I put $10,000 around the mid-90s – a lot for someone in her 20s – into a tech fund. When the dot.com bust hit, the value went down to 70 cents on the dollar. I considered putting more money in, to average the cost per unit.

Later, I found out this dollar cost averaging was a tried-and-tested strategy of distributing risks over time. Rather than time the market and buy into a fund all at once at a set price, you put it in over several instalments to take advantage of the market’s movements. A regular savings plan where you set aside a small sum, say $100 a month, also benefits from dollar cost averaging as you buy into the market through its ups and downs, across many months through the years.

But putting more into a sinking fund can be a questionable judgment. Friends warned me against throwing good money after bad. The fund slid even more. I sold it at 30 cents and took the hit. It stung.

Today, I consider the $7,000 I lost on that maiden investment, tuition fee for many valuable lessons in investment.

“ Apart from understanding how feelings of fear and anxiety can drive you to make poor investment decisions, it is crucial to understand how your behavioural tendencies can affect the execution of an investment plan.”

I internalised a wariness towards faddish investing that helped me remain stable and sceptical through the years when healthcare funds became hot (because of biotech and the world’s ageing population), and through the cryptocurrency craze and the current NFT (non-fungible token) rush.

Investment gurus generally advise against pouring too much into individual sectors (such as tech or healthcare) or into non-traditional investments. If you have $10,000 to invest, you can consider putting 10 per cent into riskier investments, like cryptocurrency, but not bet the bulk of your savings on it.

Instead, diversification is the golden rule, with investment advisers more or less agreed on the need to diversify across asset classes, sectors and geography.

But before you know what kind of diversified portfolio works for you, you have to understand yourself.

Lesson 3: Know yourself and your limits

Because of my tech fund experience, I realised early on that investing requires more than intellectual remit – it isn’t enough to research market reports or to understand financial ratios. You have to manage your own emotions, be aware of your own biases, and remain unfazed through market gyrations.

Most financial service professionals or websites have surveys to assess your risk profile. You learn how much loss you can stomach before becoming irrational and making poor decisions. Apart from understanding how feelings of fear and anxiety can drive you to make poor investment decisions, it is crucial to understand how your behavioural tendencies can affect the execution of an investment plan.

After my dot.com bust experience, I signed up with a website that offered what would today be considered a hybrid financial advisory – automated portfolio construction, with a human adviser available.

The system gave me a list of about a dozen funds to invest into. Each quarter, it would e-mail me instructions on how to rebalance the portfolio – suggesting tweaks in the proportion of money to be allocated into each fund. I would then have to log into the account and do the switches myself. And periodically (at the start of the process and twice a year thereafter), I also got to meet the fund adviser in person, to discuss any issues I had

It was a low-cost way to get professional support to help me invest my money. The only snag – I was a busy reporter with frequent deadlines, and not very conscientious about personal money management. The e-mails on quarterly adjustments piled up and I did not execute the changes in trade, leaving me with a portfolio of investments not ideal for changing market conditions.

“ One can start small, with a small regular monthly saving plan, and then learn and improve. The power of compound interest rewards those who invested early, as the principal grows rapidly over time.”

Some people have the discipline, time and knowledge, to track the market actively, set auto-alerts, and execute trades. Others need more support. After a couple of years, I knew I belonged to the latter group.

Lesson 4: Consider paying for a professional

By then, I understood my own investing weaknesses: swayed by fads and not very financially savvy, so I avoided choosing and buying my own stocks or funds.

I also lacked discipline and needed a financial adviser to construct and manage a diversified portfolio, which included administrative support to execute trades.

I approached this the way I would approach hiring a lawyer or doctor: through referrals and research.

Most financial advisers here are tied to insurance companies or specific banks. This means they are paid by their employers and incentivised to sell financial products sold by their companies.

In some countries, there are more fee-only advisers who are paid by their clients, typically via a percentage of the value of assets under management. Any commission, or what is known as trailer fees from the funds they recommend, are rebated back to clients.

In this sense, their financial interests are tied to their clients, not the companies selling the funds. They are more likely to recommend funds suitable for clients’ needs, rather than those maximising their sales commissions.

An intermediate category is fee-based advisers. These are largely paid by clients, but may retain some fees from selling funds.

I decided I would find a fee-only, or at least fee-based, adviser. I drew up a list, met them and engaged one. Today, my financial adviser is a friend and my financial coach, whose advice extends beyond the fund portfolio he manages, into other aspects of my financial life.

When robo-advisers became popular, I considered how much I would save in annual fees if I switched. It took me about 30 seconds to decide – nah, I’ll stick with my adviser. No robo-adviser could have given me the same peace of mind through the 2008 global financial crisis, the 2020 Covid-19 market plunge, or the 2022 market correction.

In my case, having a fee-only financial adviser has proven to be a good choice. Others may prefer a different approach. The key is to know your limits and preferences, and then be rational and proactive in deciding.

If there is one thing I wish I had done differently, it is to have started getting financially literate when I was younger, instead of waiting till my 30s.

Still, my adviser says that is not too late, as one has a good two or three decades to accumulate returns before retirement funds are needed.

One can start small, with a small regular monthly saving plan, and then learn and improve. The power of compound interest rewards those who invested early, as the principal grows rapidly over time.

Financial literacy is as important as digital or numerical literacy. It’s good to start learning early.

Article taken from the Straits Times by Chua Mui Hoong, Associate Editor