You may have read articles about the top mistakes investors make. Google the phrase and you’ll read a lot about over-trading, overconfidence, falling in love with a stock…or a money manager…or a market sector. You’ll read about how too much trading activity can lead to mistakes a lot of the time, and higher fees (which eat into returns) even more of the time.
But, wait…those are the mistakes the guys make in investing. In my experience, and from our research at Ellevest, the investing mistakes women make are different.
The good news is that women tend to take a longer-term perspective when investing. We tend to ride out market downturns to a greater degree and we don’t trade our accounts as aggressively. As a result, this can translate into better returns for women as compared to our male counterparts.
But that doesn’t mean we don’t make mistakes. In my years of running Merrill Lynch Wealth Management and Smith Barney, here are the ones that I saw:
1) We can overestimate the risk of stock market investments…
I can’t tell you how many women I have heard say “I would invest in the stock market, but I don’t want to risk losing it all.”
Now, I’ve lived through some pretty painful bear markets: I had just started on Wall Street in the fall of 1987. I had a front-row seat for the downturn of 2007/2008. (Believe me, I’ve got the wrinkles to prove it.) But the stock market has never lost all of its value.
Without risk, there is no opportunity for investment return. You can’t have just the return without some of the bumps along the way. That said, even with these downturns, historically, between 1928 and 2015 the stock market has returned 9.5% annually. So over that period, the up years have well outpaced the down years.
And, by the way, “investing” is not just investing in the stock market. Smart investing should be into a diversified portfolio, including stocks but also bonds and cash, as well as (for some) alternative investments. That can smooth out the ride.
2) Because we can overestimate investment risk, many of us don’t take on enough risk in saving for retirement
Quick question for you: we live longer than the guys, by 5+ years. Should we therefore take on more or less investment risk than they do, in order to fund our longer-than-their retirements?
Answer: Generally, more.
That’s so that we have the opportunity to earn higher returns, over time, that we’ll need to last us over those longer lifespans.
And the good news is that our greater longevity itself enables us to take on more risk, so that we may have time to ride out the downdrafts that inevitably occur over longer investment horizons.
How much longer? If you’re in your 30s or 40s and in good health (yoga or SoulCycle, anyone?), plan on living into your late 80s or beyond.
(Sounds nerve wracking? At Ellevest, we help you understand how much risk you may be able to take to retire well in the majority of markets, and build your investment portfolio to that end. And to help you reduce risk as you get closer to your goal, our portfolio recommendations get more conservative, to increase the chances that you may achieve your goal.)
3) We think we have to “know everything” before we invest.
I don’t know about you, but I loved turning over the test at school and seeing that A. And we women can carry that through our lives…wanting to be knowledgeable enough “to get the A.” As a result, so many women I speak to have a big stack of “investing reading,”that they really are planning to do, sitting on their bedside table.
And while we can all stand to know more about compound interest, or what standard deviations are, or what beta is — we will never know everything. I would never argue against more financial education, but waiting til we “know everything” is very expensive. I’ve seen it deprive women of years of investment opportunity. (See #7 for exactly how expensive this can be.)
4) We can forget our most important asset: ourselves.
One great way to have more money for retirement is to earn more money. Think about it: if you are like the typical woman in the U.S., you are making 78 cents to a man’s dollar. Get to that dollar and you’ve just earned a 28% return on what may well be your biggest asset: your salary.
And to put this in context, if you’re earning $85,000 a year and you get that raise, that can mean you earn another $1.1 million over the next 40 years*.
Now turn around and invest that puppy (no upgrading your home, no buying that Ferrari) and you may have another $1.2 to $2.3 million – or more – at the end of 40 years*.
I hate asking for a raise, too, but this is A LOT of potential return on one-meeting-I-really-don’t-love-having-with-my-boss.
5) We settle.
We settle for our partner’s financial advisor, or financial firm. Or, worse, we settle for letting our spouse or partner hold the reins on this.
Yeah, I did that. And that worked just fine…up until the moment I found out that my now-ex-husband was having an affair with my now-ex-friend. Ok, ok, ok, your spouse or partner won’t do that (but hey, if Beyoncé can get cheated on). For something this key to your future, aren’t two sets of eyes better than one?
(And I don’t want to hear that he’s a “better investor” than you are; that’s simply not what the numbers show.)
6) Setting goals but not investing for them.
A goal that you’re not actively planning for is just a dream. You may have seen the research that writing the goal down can substantially increase your chances of achieving it; writing it down, setting aside money for it, regularly adding money to it and investing toward it? Well, there’s likely no stopping you.
Some rules of thumb: at Ellevest, we recommend that you have 2 years of salary (net of taxes) set aside before you launch your new business, to give yourself the runway you need to make it work. We recommend that you increase your “Emergency Fund” from three months of take-home pay to at least nine months if you want to have, or already have, a kid. (Believe me, they’re expensive. Crazy expensive.) And for retirement, your goal should be to get to 10 to 15 years of your pre-retirement salary.
7) The biggie: We (significantly) underestimate the costs of waiting to invest.
We wait. We wait til we know more (see above). We wait for the right time to invest. We wait til the market is quieter, we wait til we get the raise, we wait til we find the time — because we’re busy. We wait til we can focus on it. We wait til we can talk to our partner about it. We wait because it can be such a weird topic. We wait because the last time we talked about it, we got in a fight.
So we wait.
And it costs us. Quick calc: again, say you’re making $85,000 a year, saving 20% of your salary, and putting it in the bank instead of investing it. Wait five years to invest and that just cost you more than $170,000 when it’s time to retire. Wait ten years, and you’re down more than $337,000*.
And, in case you’re wondering, that cost of waiting is almost $100 a day. Every day. I’m going to say that again: it costs us $100 a day*.
What would you do if $100 fell out of your purse every day? You wouldn’t wait until you had time to fix it. You would fix it.
I know some of this can be headache-inducing. I get it. That’s why our entire raison d’etre at Ellevest is to help you get invested, so that you can close your personal investing gap. Believe us, nights, weekend, too many cups of coffee…we’re fundamentally rethinking investing for women, and we’ll be inviting you in soon!
Disclosure: We project the growth of an $85,000 starting salary using a women-specific salary curve from Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. For the raise, we project the same at a starting salary of $110,500. We add up both salary amounts over a 40 year period. $1.1M is the difference between the two sums, in today’s dollars.
Disclosure: The low end of the range assumes that 20% of the new salary ($110,500) is invested with a financial advisor in a diversified mutual fund portfolio comprised of 60% equity and 40% bonds, and is rebalanced to this allocation each year. Fees include average mutual fund fees and an assumed advisory management fee of 1%. The high end of the range assumes that 20% of the new salary is invested with Ellevest in a diversified low cost ETF portfolio comprised of 91% equity to start and growing more conservative towards the end of the investment horizon. Fees include those for the recommended ETFs and Ellevest’s fee of 0.50%. These results are determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results here reflect a 70% likelihood of achieving the amount shown or better, and include the impact of inflation, realized capital gains, and taxes on interest.
Disclosure: We compare the wealth outcomes for a woman who begins investing at age 30 with one who began investing at age 35 and another who began investing at age 40 after having saved in a bank for 5 and 10 years, respectively. All women began with an $85,000 salary at age 30 and all salaries were projected using a women specific salary curve from Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc., which includes the impact of inflation. We assume all women save 20% of salary each year.
The bank account yields a 1% average annual cash return and a 17% tax rate on the interest earned, with no account fees. The investment account assumes an investment with Ellevest using a low-cost diversified portfolio of ETFs beginning at 91% equity and gradually becoming more conservative during the last 20 years, settling at 56% equity by the end of the 40 year horizon. These results are determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results reflect a 70% likelihood of achieving the amounts shown or better, and include the impact of Ellevest fees, inflation, and taxes on interest and realized capital gains. The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons.
The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons.
Disclosure: We divided the calculated cost of waiting 10 years to invest, $337,657, by 3,650 (the number of days in 10 years). The resulting cost per day is about $92.50.