A majority of women generally feel less confident about investing compared to men. Most of those who are hesitant to invest give reasons such as lack of knowledge and fear of losing money. Some studies have even found that women are nearly twice as likely as men to describe their investing knowledge as "non-existent”.
But the harsh truth is that there is an "investment confidence gap" amongst women that goes beyond just lack of investing knowledge. Since investing is a good way to build generational wealth, it's important for women to be aware of such factors and create strategies to overcome them. Read on to learn more.
What Is the Investment Confidence Gap?
The term "investment confidence gap" refers to the differences in confidence levels between different groups of investors, especially between men and women. The main aspects of this gender investment gap are:
- Women tend to have less confidence in their investing abilities
- Women invest less frequently and keep more assets in cash
- Women generally trade less frequently than men, which can actually lead to better returns
In most cases, women face unique challenges when it comes to investing, like career interruptions, lower earnings, investing confidence, risk aversion, and having other priorities.
But even if you remove the knowledge issues and structural barriers, you'll still find an investment confidence gap amongst women.
4 Factors that Affect affect Women's Confidence in Investing
Besides insufficient investment knowledge, the factors that specifically affect women's confidence in investing are mostly brought about by societal conditioning and internal self-perceptions. They include a self-assessment gap, risk perception, second-guessing, and expert syndrome.
Let's see how each of these factors affect women's investment behaviors below.
1. Self-Assessment Gap
It's almost unbelievable how most women underestimate their abilities when asked to rate their own financial knowledge. They might score the same as men on financial literacy tests, but their self-ratings say something different. So, there's a gap between women's actual competence and how they perceive their ability to invest.
Think of it like this: Two people complete the same investment test and both score 90%. The man might say "I'm pretty good at this," while the woman is more likely to focus on the 10% she got wrong and consider herself still learning.
Also, a Merrill Lynch study shows women are often equally as confident as men in performing other financial tasks like budgeting, choosing insurance, and paying bills. But when the topic changes to managing investments, only 52% are confident compared to 68% of men. This self-doubt is seen even among women working in financial services.
2. Risk Perception
Women are generally thought to have lower risk tolerance than men. For some though, it's less about their actual risk tolerance and more about confidence in decision-making. This means when such women feel equally confident about an investment, they can take similar risks to men.
Several studies have shown women are less likely to trade in reaction to market shifts during periods of volatility. And it leads to better long-term returns. They actually do better than men at investing by 1.8%. This suggests most women aren't necessarily afraid of the risk of investing. But they're just less confident about making quick decisions without thorough understanding.
3. Second-Guessing Despite Good Results
A 21-year study by Berkeley researchers found that men trade 45% more frequently than women, yet this extra trading actually reduced their net returns. Despite better results, women reported less confidence and showed more hesitation in their trading behavior.
So, if women are better traders and investors than men outperforming them by over 1%, what keeps women from investing more? You can see it's not about knowledge in this case. Instead, it's more about women being more likely to question their judgment even when the evidence shows they're making good choices.
4. The Expert Syndrome
Another reason why women are likely to feel less confident about investments and end up investing less is expert syndrome. Many women feel like they need complete mastery before considering themselves qualified to discuss investments.
The desire to be more knowledgeable about investing before discussing it even with a professional isn't really about actual knowledge gaps. Often, it's about women setting higher bars for themselves before feeling confident to engage. A woman with the same knowledge as a man is more likely to feel she needs to study more before making investment moves or challenging professional advice.
What’s the Impact of the Investment Confidence Gap?
The investment confidence gap affects women investing behaviors and strategies in various ways. On the brighter side, it causes women to be more cautious and patient once invested, often resulting in better long-term performance compared to men.
However, it becomes concerning when the lack of investing confidence stops women from investing since it's one of the surefire ways to build wealth and secure financial futures.
Even the hesitation to invest more and early is not good as it significantly affects compound growth over time. When women wait longer to invest or prefer saving cash, they miss out on years of potential market returns. For instance, keeping an extra 20% of savings in cash rather than invested over several decades can translate to hundreds of thousands in lost growth potential.
Also, the tendency to underestimate their financial capabilities doesn't help. It can become particularly problematic during major life transitions like divorce or widowhood, when confidence in independent financial decision-making becomes crucial.
Start Taking Control of Your Financial Future Now
Are you investing as much and often as your future self would like you to? If not, now is the best time to start making the right financial decisions. Be more aware of what makes you invest less, whether it's knowledge gaps, structural barriers, expert syndrome, second-guessing, or self-assessment gap. Once you know what's stopping you, it's easier to take proactive steps to overcome it.
If you'd like to start with developing financial accountability, we have an innovative tool that helps women track their discretionary spending and invest the matched amount in a diversified ETF. You would be surprised how much your portfolio can be worth by investing this way.
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