Everyone’s heard about the gender pay gap – but have you heard about the gender investing gap?
Men and women prefer to save and invest in markedly different ways, and these habits can have profound implications for their financial security in later life.
Hidden gender gap
It all begins with the astonishing fact that there are one million more women with cash ISAs than men, according to HMRC figures.
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So, in aggregate women are committed savers despite typically earning less (the gender pay gap is 8% for full-time work) and there being six million women in part-time roles, holding 75% of all part-time jobs.
However, there are more men with stocks and shares ISAs than women in every age bracket. Among 25- to 34-year-olds, men are nearly twice as likely to have a stocks and shares ISA than women the same age. This matters because the earlier someone starts investing the more time they have to potentially benefit from compounding – when returns are made on top of returns.
Men are also more likely to take greater investment risks. Higher-risk investments potentially mean higher returns, but also a heightened risk of capital loss, including losing all the money invested.
For example, among the 200,000 customers at digital wealth manager Nutmeg, the average risk among male investors is 6.5/10 while the average for female investors is 5.65/10.
Why do women fear risk?
There’s no single “cause” of the gender investing gap, but as with all behaviours, our culture and the prevailing economic climate have an influence.
A good example of this is the way risk appetite has fallen for both male and female customers at Nutmeg since the Covid pandemic began. The shock of lockdowns, furlough and job losses followed by economic recession and more recently, the cost of living crisis, has likely encouraged households to be financially cautious.
For women in particular there’s the portrayal of stock markets and investment as industries rife with machismo, gambling and cavalier attitudes to risk – watch any of the blockbuster films about financial services made since the global financial crisis of 2008-9, and you’ll see this stereotype play out. Of course, this isn’t the reality for most investors building nest eggs over the long term.
Types of risk
This issue of women tending not to invest or invest in a “risky” way highlights a problem with how financial risk is perceived.
For many people, the notion of taking risks with their money means “potential for losing it”, which is called “investment risk”. Capital loss is a very real possibility with any investment, but it’s not the only risk with money.
What about inflation? Or being unable to sell an investment when you need the money? A good financial plan should look at all the potential threats to your finances – including the drawbacks of not investing. These include:
1. Shortfall risk
The point of saving and investing is to have enough money to pay for something in the future. Although some financial goals can be pushed back to a later date – such as retirement – for other goals a specific amount needs to be reached by a certain date.
Someone hoping to fund their grandchild through university, for example, probably won’t want to ask a teenager to delay their education for five years until they have enough saved.
Shortfall risk can increase when a person regularly saves too little or when savings are held in cash for a long time. The interest rate on savings accounts may be lower than inflation, which means over time the “real” value of the cash pile diminishes.
For some financial goals, investing can help counteract shortfall risk – although some investments carry the risk of capital loss, which would increase shortfall risk!
2. Inflation risk
When consumer price inflation surged to a 41-year high of 11.1% in 2022 it was a rude awakening for many people who hadn’t lived through a period of wayward price rises.
Inflation erodes the buying power of money which is why a “do nothing” approach to saving – where money is left to languish in any old account – can leave a nest egg prey to inflation risk over time.
3. Longevity risk
This is the danger that someone outlives their retirement savings and it’s especially an issue for women who have a longer life expectancy – 83 years compared to 79 years for men.
People think of investing as a way to make money, and it can have that potential, but investing is also used to preserve wealth. Someone managing longevity risk should balance their investment strategy with their age.
The theory here is that younger people can take more investment risk to increase their chances of higher returns while knowing they will probably live to their seventies and have time to make up for any financial losses.
An older person would need to be cautious with investment risk to preserve their wealth, as they need what they have to last them.
Being mindful of risk
The gender investing gap is strange because, on the one hand, women are savvy about building up a nest egg in tax-efficient ISAs where there is no tax to pay on savings interest, dividend income or investment returns.
On the other hand, some women are missing a trick by leaving all their savings in cash while some of those who do invest could likely benefit from being less cautious.
The root of the problem is how “risk” is perceived, through the distorted lens of investing as a risk-laden activity and saving in cash as the “safe” option.
Risk with money comes in many forms and closing the gender investing gap could help more women combat some of them.
Nutmeg client data correct as at 21 February 2023. Average risk rating is calculated as the mean for the fully managed and socially responsible portfolio ranges, where risk levels are available from 1 – 10 (where one is the lowest risk level).
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatments depend on your individual circumstances and may be subject to change in the future.
Annabelle Williams is a personal finance specialist at Nutmeg and the author of Why Women Are Poorer Than Men and What We Can Do About It.
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