Should Financially Savvy Women Invest in the Stock Market Right Now?
For investors looking to get into the market, it can seem particularly challenging these days to decide on the right time to make the move. After all, the nearly 20% decline in the S&P 500 Index in calendar year 2022 is barely in the rear-view mirror. And the fall of banks like Silicon Valley Bank and First Republic may not provide a lot of confidence in the financial system.
For women investors, the problem is particularly acute because of some of the unique challenges women face with their finances. For example, did you know:
Women live 6 years longer than men on average, so they have more years of retirement that they need to fund.¹
On the other hand, American women earn 82 cents for every dollar earned by men.²
Partly because of this earnings gap, men contribute nearly 40% more than women to retirement plan accounts.³
50% of women age 55-66 have no personal retirement savings.⁴
Women tend to hold more cash and lower-return assets in their portfolios.⁵
Only 1/3 of women see themselves as investors.⁶
69% of women wish they had started investing their extra savings earlier.⁷
So, feeling cautious is understandable. It’s human nature to want to avoid pain, and losses in the market can definitely feel painful. In fact, behavioral finance research shows that the pain from losses affects us twice as much as the joy felt from gains. This is a cognitive bias called ‘loss aversion’.
However, contrary to the emotional messages your brain may be receiving, it’s important to remember that the stock market is a long-term investing tool, and you could reap lasting financial rewards by letting the intellectual side of your brain win this internal debate.
And here is where we come to some encouraging statistics about women and investing. Women are controlling increasing amounts of wealth, getting more involved in investing than ever before, and achieving some good investing outcomes. Consider the following:
Studies suggest that women will control 75% of global discretionary spending by 2028.
In 2021, 67% of women invested outside of their retirement plans, up from 44% in 2018.⁶
Women get slightly better investing returns than men, with studies finding differences of 0.4%.⁶
Women trade 40-45% less frequently than men; frequent trading has been linked to decreased investment returns⁷
Women tend to earn higher returns while taking on less risk than men⁸
So, while everyone should make sure their savings are working hard for them, studies suggest that women in particular must be smart and proactive about building wealth to ensure a strong financial future.
Investing in the stock market may be an important part of building a successful long-term financial plan. Historically, the stock market has been a principal vehicle for building long-term wealth.
Consider that the average annual return for the S&P 500 index over the last roughly 100 years has been 9.8% per year (before inflation). And annual returns have been positive for about 75% of those years.
So, let’s say that you are realizing the need to move past your investing concerns to build long-term wealth. How can you decide when and how much of your available cash to invest in the stock market?
You may think that answer needs to be complicated. There are some ways to simplify your investing strategy. One straightforward approach is to match your investing plan to the timing of your goals.
In other words, follow these steps:
Start by making a list of your goals
Decide roughly when you will need money to be available to fund each goal
If you won’t need the money for at least 5-10 years from today, consider investing your extra money in the stock market.
For example, if you need to pay your child’s college tuition bill in January of next year, the stock market is a risky place to put that money, because in any given year the market could go up or down by 10%, 20%, 50% or more.
However, if your child is 3 years old and you have 15 years for that money to grow, investing in stocks could be one of the best ways to turbo-charge your ability to pay those large tuition bills. As you get within 7-10 years of needing to use that money, you would decrease the portion of the money invested in stocks, and increase the amount held in relatively safer bond funds and cash, which take lower risk and also tend to provide lower returns over the long term. This is exactly how age-based funds in college savings 529 plans work. And the same approach can be applied to other goals.
While no one can guarantee whether future markets will perform similarly to past markets, we can use past stock market volatility and returns as a guide to create some simple some rules of thumb.
Here is one sample approach of how to invest based on the timing of your goals:
Goals that are within 1-2 years: cash or short-term bond funds*
Goals within 2-7 years: intermediate-term bond funds*
Goals 7-10+ years from now: stock funds*
*We recommend low cost well-diversified short and intermediate bond funds and low-cost globally diversified stock funds. Discuss these choices with your advisor.
In determining the time periods and investment choices noted above, we looked at how long it typically takes for the stock market to recover from a downturn.
As you can see from this chart, the stock market may move significantly up or down in any one year. And the actual length of time it takes for a stock market downturn of -10% or more to recover has varied a lot over the years. According to an LPL Financial analysis, on average, it has taken about 19 months for stocks to recover losses from a bear market (a loss of 20% or more) or a near bear market. Our own independent research confirms this finding, and also shows that, if dividends are included, the recovery period has been 12 months on average.
Important Note: your own investment strategy should be tailored to your customized financial plan and your own personal risk tolerance. For example, if the timing and amount of one of your goals are not at all flexible and you expect to need that money within 10 years, you might choose to only invest in cash or bonds so there is less risk that a prolonged market downturn jeopardizes your ability to cover the goal.
In summary, stock market downturns are to be expected. By focusing on the long term and investing in the market for goals that are 7-10+ years from now, investors can increase the likelihood of a secure financial future.
At Quantum, we provide investment education to help our clients feel confident in their investment strategies. Contact us if we can help you create a personalized financial plan that will give you the jump-start you need to ensure your money is working as hard as you are.
Sources:
1. CDC
2. Pew
3. TIAA and Vanguard: “Comparing the saving behaviors of women and men in DC plans”
5. BlackRock, Vanguard
6. Fidelity 2021 Women and Investing Study
7. Vanguard; “The same but different: Gender and investor behavior in Vanguard retail accounts”
8. Wells Fargo
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Investments involve risk and, unless otherwise stated, are not guaranteed. The Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is not indicative of future results. Readers of this information should consult their own financial advisor, lawyer, accountant, or other advisor before making any financial decision.
