When investors hear the word “risk,” they often think about losing money. But investment risk is broader than just market decline, as there are also risks of not earning enough, of inflation reducing purchasing power, and of reacting emotionally to short-term volatility.
We use the term “Risk Gap” to describe differences that have historically appeared in how women and men perceive, tolerate, and respond to all components of financial risk, as well as the implications those differences can have for long-term investing.
Of course, it would be inaccurate imply that all women are more risk-averse in investing than men, but some data does indicate that these tendencies may exist.
For example, one oft-cited study from 2012 titled “Strong Evidence for Gender Differences in Risk Taking” took 15 different datasets from thousands of participants to conclude that women systematically invest less in riskier assets and appear more financially risk-averse than men. Is this inherently a bad thing, though? Not necessarily.
Caution Can Be a Strength – and a Drawback
As we discussed at length when unpacking the concept of the Confidence Gap, while a lack of confidence can surface friction points when it comes to investing, overconfidence can lead to unnecessary activity and its own set of problems.
However, avoiding volatility altogether can mean accepting other risks. While a portfolio heavily concentrated in cash or very conservative investments may fluctuate less, it doesn’t make it risk-free. Or put another way, the safest-feeling portfolio is not necessarily the one with the lowest risk to your financial plan. As mentioned above, market risk is one dimension, but there is also inflation risk (your money may buy less over time), longevity risk (your assets may need to support you for decades), and shortfall risk (your portfolio may simply not grow enough to fund your goals).
Time is also a critical factor, too.For someone investing for a goal 20 or 30 years away, short-term market volatility may matter less than insufficient long-term growth. Conversely, someone approaching a near-term withdrawal may need considerably less market exposure.
Risk Tolerance Is Only One Piece of the Puzzle
When assessing how much risk you are willing to take, consider also that your own personal tolerance for risk needs to be considered alongside capacity and need.
If risk tolerance asks the question, “How much uncertainty can you emotionally tolerate?”, risk capacity asks, “How much risk can your circumstances actually absorb?” And similarly, required risk asks, “How much investment growth does your plan need?”
Considering these thoughtfully will help you be better equipped to decide which risks are necessary for your goals, which risks are simply not worth taking, and how much volatility you (and your financial plan) can withstand.
A personalized portfolio should reflect both the math of the financial plan and the individual investor who must tolerate the ups and downs.
Steps to Begin Closing the Risk Gap
Over the next few months, we’ll explore in more depth specific ways to start closing the Risk Gap, as well as some of the myths and contradictions that accompany this topic. Along the way, we’ll explore the role that behavioral finance can play, navigate the complexities of when couples have their own clashing risk tolerances, and much more. But for now, here are a few initial things to keep in mind as you consider your own relationship to risk.
1. Define risk in terms of your goals: Instead of asking whether an investment is “risky,” ask what specific risk it creates, and what risk it may help address.
2. Know your time horizon: Money needed next year should usually be treated differently from money intended for decades from now.
3. Separate feelings from financial capacity: Addressing concern about volatility is important, but it should not be the main driver in determining the appropriate portfolio.
4. Create rules before markets become emotional: Decide in advance how you’ll respond to volatility rather than making major decisions during periods of stress.
5. Stay involved: If someone else has traditionally handled investing in your household, start participating in conversations about asset allocation, risk, goals, and why the portfolio is structured the way it is.
Finally, and not too surprising, it is reassuring to keep in mind that most investors do not enjoy risk. A 2024 FINRA Investor Survey found that only 8% of investors said they were willing to take substantial investment risk, down from 12% in 2021, so discomfort with risk is hardly unique to women investors.
Understanding risk may not eliminate uncertainty, but it gives you context and perspective for deciding which uncertainties are worth accepting in pursuit of the future you want.
Important Disclosures:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Grimes & Company Wealth Management, LLC (d/b/a Grimes & Company), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Grimes. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Grimes is engaged, or continues to be engaged, to provide investment advisory services. Grimes is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Grimes’ current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at https://www.grimesco.com/form-crs-adv/. Please Note: Grimes does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Grimes’ web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Grimes client, please contact Grimes, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian./