Women face more challenges than men in wealth creation, particularly in South Africa, where the gender pay gap ranges between 23 and 35%, exceeding the global average of 20%. Alongside women taking breaks from the workforce for childcare, this results in lower lifetime earnings and significantly less wealth upon retirement than men. Furthermore, women often invest in low-return vehicles such as savings accounts or money market funds. However, studies, including a comprehensive investigation by Fidelity, reveal that women’s investments tend to outperform men’s, with a 0.4% annual advantage. In an interview with BizNews, Julie Anderson, a wealth manager at Overberg Asset Management, attributed women’s investments’ success to behavioural characteristics unique to them. Despite being less risk-tolerant, women are responsive to facts and make considered decisions. In contrast, men tend to be overconfident regarding investments and tend to overtrade. Moreover, Anderson noted that contrary to prevailing beliefs, women are far less emotional than men in making investment decisions. – Linda van Tilburg
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Excerpts from the interview
Challenges women face in wealth creation, South Africa’s pay gap bigger than the global average
There are a few unique challenges that women specifically face when it comes to wealth creation. It is promising that progress has been made in this regard. The unfortunate reality is that in South Africa, the median gender pay gap is between 23 to 35%, which exceeds the global average of 20%. Women are starting on the back foot already. In addition to this inequality in earnings, many women may also elect to leave the workforce in favour of childcare for several years. This means that these two material factors combined significantly reduced a woman’s lifetime earnings. Data from the World Economic Forum shows that women have 30 to 40% less wealth upon retirement than men. That is a significant problem. The second challenge is because of advances in medical science, our life lifespans have been extended significantly from just a couple of generations ago, and women have a longer life expectancy than men. In South Africa, on average, women live about four years longer. While some women may have access to other resources, for example, from a spouse or an inheritance, perhaps, I’m looking at things from a self-sufficiency perspective. This presents as a far more challenging financial exercise for women to accrue sufficient wealth during their working years to maintain their standard of living and retirement whilst also ensuring the longevity of funds for the duration of their lifetime.
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Women tend to have money in vehicles with low returns
Another challenge women face is that they are still less inclined to invest their money than men, which is a phenomenon referred to as the investment gap. So firstly, women are facing the wealth gap, but now also the investment gap. What we see as a result is that women tend to have far too high a proportion, or even all of their money saved in savings accounts or very low-risk investments like money market funds, which means that they’re extremely unlikely to ever achieve above inflation returns, meaning that the purchasing power of their money is just being eroded over time. I was in this scenario just two days ago; I met with a lovely lady who was 66 and had the bulk of her money in the money market. So, this is something that is observed on a practical level in my field.
Studies find that women’s investments outperformed men
To my knowledge, the most comprehensive study performed in this area was by Fidelity, one of the biggest asset managers in the world. This is a widely quoted study because it was so broad in scope. They analysed over 5 million customer accounts from 2011 to 2020, and the results showed that women’s investments outperformed men’s by 5.4% per annum over that period. Given the impact of compound growth, this becomes a significant factor over the long term. Studies within the South African context further support fidelity’s research results. A local study by Willows and West, from UCT, conducted in 2015, showed that generally, women outperformed men on a risk-adjusted basis. This differential was even more significant for women aged 60 and above. I hope this information is both empowering and inspiring for the female listeners out there, and it makes them feel more confident in their ability to invest and that their inherent characteristics mean that they’re very well positioned to become successful investors.
Gender Differences in investing, men over-confident, overtrading, women less emotional
Regarding behavioural characteristics, one positive thing is that women appear to have a higher propensity to save than men. That implies that women have a more diligent and disciplined approach to their finances, which is very positive.
The behavioural approaches of men and women are due to two intrinsic gender-specific behavioural biases. The first bias is that studies have shown that women tend to be less risk tolerant than men, with risk tolerance being the degree of uncertainty an investor is willing to bear. But having said that, women are also more responsive to facts and take a more considered approach to decision-making than men. Interestingly, this is supported by neuroscientific findings around the physiological differences in cognitive function between the genders. Very, very interesting. So, a key takeaway is that when women are armed with the requisite knowledge and facts around investment risk that enable them to make informed investment decisions, this differential towards risk appetite tends towards zero. Women become just as willing to embrace risk as men. The provision of appropriate financial advice is therefore central to this process. But to get back to the fact that women have been proven to be better investors because, again, I don’t think this is a well-known phenomenon. The second behavioural bias that comes into play here is that men are far more prone to the overconfidence bias. But in the investment context, that means that men can hold unrealistic expectations regarding potential returns, and this causes men to be more reactive to short-term events than women. This leads to another investment bias of over-trading. Over-trading has proven to have an inverse effect on investment returns over the long term. This is due to two things resulting from both missed time trades. So, in other words, there’s a high inclination to sell when the market is down, mainly if a stock is down, thereby realising a capital loss and the increased costs associated with an increased number of trades. There are various studies on this, but the research shows that men can perform up to 56% more investment switches per year. An essential element of the wealth manager’s role is to ensure that clients don’t let emotions take over and that we stick to the strategy. Contrary to prevailing beliefs or stereotypes, what is very important here is that women are far less emotional than men when making investment decisions. That, indeed, I don’t think, is the prevailing view, but women tend to take a longer-term view with a greater focus on the realisation of a financial goal instead of chasing short-term performance.Â
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How women can get started on wealth creation
There are some broader tips that I’d like to share to assist people, perhaps to get started. So, the first is to analyse your spending habits. What you want to do is you want to start where you are and with what you can. The best thing is just to get started. First, assess your monthly income and expenses and draft a realistic budget. Then at the end of the first month or maybe two months, compare your actual spending against your budget. This will highlight where you’ve overspent and possible areas to cut back towards a greater contribution towards an investment. So that’s number one. Once you’ve done that first exercise, that will indicate the potential you can put away as an additional contribution. What is very important, then, is to set yourself a financial goal. So, in other words, you’re going to put away an additional X amount per month, so you’ll have Y at the end of the year or five years or whatever the case may be. This goal-setting exercise is particularly important for women. Then thirdly, once you gain some certainty around that sum, you should just set up a debit order. This is one of the pieces of advice that’s always stuck with me from the book Rich Dad, Poor Dad is to pay yourself first. Setting up a debit order means that money immediately comes off your account. It’s automatically going to the investment. If you take the approach of just saving whatever you have at the end of the month, it’s very unlikely that it will align with the goal you set for yourself. If it’s deducted automatically, your behaviour and spending habits will generally adjust accordingly, and you’ll be far better positioned in the long run.
Start early and leverage to reduce the wealth gap for women
The most effective method to reduce this very major wealth disparity for women is to leverage the effects of compound growth to their advantage. This is the principle of accruing growth upon growth, leading to exponential earnings over a long-term time horizon. And given this discrepancy in wealth, it’s even more critical for women to start investing as soon as they start earning over and above any employee benefits scheme as a compensatory measure. Again, it’s easier said than done, but I’m just putting it out there so women can hear this message. So, I would like to illustrate how powerful the compounding effect can be. I’m just going to give two very simple examples. So, consider two scenarios. First, if you start investing at 25, you are contributing R1000 per month, earning a 7% annualised return. At age 65, you’ll have just over 2.6 million. Compare that to starting investing at 45—same thing, contributing a thousand rand a month, earning a 7% annualised return. You’ll have just over R520,000 at age 65. Looking at the figures, in the first scenario, you’ve contributed an extra R240,000 towards the investment during that period. But the additional almost R2.4 million you’ve earned is purely attributable to the compound growth over a longer period. Advising compound growth might not be the most exciting, but it is the most effective. One of the most frequent comments I hear from people I meet or potential clients is that they wish they’d saved more when they were young. They wish they’d started investing sooner. They wish they’d been shown where to start or how to start because the very harsh reality is that there is just no replacement for time in the market. The later you leave it, the greater the proportion of your income will need to be contributed towards your investments to achieve either a desired or a necessary financial goal until the point where it may not be feasible to get there. I mean, it’s not realistic to think I’ll have to contribute 80% of my income. So, the earlier you can start, the better, and it’s something that your future self will thank you for.
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