Three Key Questions for Women Who Invest (or Should)

Meet Lorraine Fox, today’s guest post author and senior investment advisor at ClearRock Capital. Take The Lead does not give financial advice or endorse any particular approach, but we do think women’s financial literacy is one important key to women’s leadership parity. We are pleased to welcome Lorraine to kick off a discussion of this important topic to women who invest. And we’ll be interested to know what other aspects of the subject you’d like us to feature here.

As an investment advisor, I have had many conversations with women, and upon reflection, believe that women need to “take the lead” on investment decisions.FinanceAfter all, women manage risk better than men, according to several studies. One notable 2001 study from the February edition of The Quarterly Journal of Economics called, “Boys Will Be Boys: Gender, Overconfidence, and the Common Stock Market” concluded that women’s risk-adjusted returns beat those of men by an average of about 1% annually.  A second study from 2012 called “Women in Alternative Investments” reported that over the previous five years, women-owned hedge funds performed better than the overall population of hedge funds.Given these findings, why don’t more women “take the lead” in investment decisions for themselves and their families?  Part of the answer could be due to a cultural belief that men handle money, and women spend it.  Women also have been historically underrepresented in the economics profession. We need to close the gender gap in finance and economics.In the meantime, though, let me share with you a simple framework to help you evaluate your investments, as well as make investment decisions. Let’s focus on the investment strategy and asset allocation, risks, and costs.Investment Strategy:First of all, you need to determine your goals and the risk you are willing to take in order to meet those goals. Investment goals can include capital preservation, income generation, or growth. A good, diversified investment strategy will enable you to take the level of risk with which you are comfortable.The more diversified your portfolio is, the better it will weather volatile economic periods and the better performance you should have over longer periods of time. The converse is also true: more concentrated portfolios tend to experience more volatility. A diversified portfolio will include allocation to multiple asset classes that are not highly correlated with each other. These asset classes include domestic equities, fixed income, developed economies, emerging markets, real estate, and commodities.  For an example of the difference between diversified and concentrated portfolios, consider the losses incurred by investors who had over weighted the technology sector in 2001 versus those investors who were well diversified across multiple asset classes.Educate yourself when evaluating investment decisions. If you use the services of an investment advisor or broker, try asking the following questions:How is your portfolio allocated?Do you have investments in multiple asset classes, such as domestic equities, fixed income, developed economies, emerging markets, real estate, and commodities? For each and every investment decision, you should understand the reasons for investing in these different asset classes and how it will benefit your overall portfolio. You should also understand how each of these asset classes has performed against the relevant benchmarks. For instance, domestic equities are usually compared to the S&P 500 index; fixed income is typically compared to the medium-term U.S. bond index; developed economies are compared to the MSCI EAFE index, etc.How Much Risk Are You Taking?I recently reviewed a successful woman’s portfolio who asked me to help her understand her account statement. When we analyzed her portfolio, we found that she was taking much more risk than she had intended. Her portfolio was allocated only to domestic equities and emerging markets and had no allocations to any other asset class!This analysis allowed her to go back to her investment manager and ask why he had allocated her in such a manner. His response was uninspiring; he said, “Well, I didn’t want to lose a lot of your money,” although in reality, he had. Needless to say, she ended her relationship with this investment manager.What Are Your Costs?Costs can make a big difference in an individual’s performance. These costs can include trading costs and fee-based services. To demonstrate just how much costs can impact a portfolio, over a thirty-year time period, the growth of a $1 million portfolio that had 8% annual returns would have been $7.6 million with 1% annual investment fees but would have been almost $2 million less ($5.7 million) with 2% annual fees!Investing is a complex subject, and we have only scratched the service. Let’s “take the lead” in order to educate ourselves about this very important aspect of our lives. In fact, why not start a sister organization to girlswhocode.org called girlswhoinvest.org?  Are you in?  Let’s continue the conversation.  You can email me your ideas or questions at lfox@clearrockcapital.com.