To celebrate International Women's Day 2022, we take a look at why women are less likely to invest than men and how we can bridge this gap.
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Before I started working at MyWallSt, my perception of finance was rather negative. Movies like The Wolf of Wall Street and The Big Short showed that many firms made money by exploiting the ambiguity of the sector. In other words, the scale and complexity of the financial world is so vast that it can seem impossible to fully understand, which allows powerful players to function unchecked. You might be thinking "that's the purpose of regulation", but the United States spent much of the 80s and 90s scaling back regulatory measures, inevitably setting the stage for the Crisis of 2008.
And things haven't really changed. Despite reforms like Dodd-Frank, there still seems to be a fundamental disregard for regulation in the banking industry. Regulators themselves even seem indifferent to their own importance, often becoming sympathetic to those they are meant to be monitoring in a phenomenon known as regulatory capture.
What I'm trying to say is that the financial sector didn't seem transparent or accessible, and that made benefits like investing seem really risky, especially if you feel you don't have the expertise, time, or tools to mitigate that risk.
Importantly, I'm not alone. Millennials and older members of Gen Z seem to be shell-shocked by the events of 2008 and are therefore less likely to be investors. They are also less likely to have the capital to invest as wages have stagnated. Millennial men make just about the same as Gen X, but less than the Baby Boomers, and more and more Americans graduate from higher education with student debt. Significantly, all of these factors exacerbate existing inequality within the investment sphere, particularly the disparity between men and women.
The Investing Gender Gap
Women are less likely to invest -- it's just a statistical fact. In 2018, a survey by MassMutual found that just 41% of American women invest, compared to 55% of men.
For Millennial women specifically, the statistics are even worse. Only 26% invest outside of their workplace retirement accounts compared with 43% of Millennial men. When women do invest, they do so cautiously, typically investing 40% less money, preferring low-risk options like bonds and index funds, and leaving 71% of their portfolio in savings. This is reflected in the customer breakdowns of retail investment platforms -- only 15% of eToro's users are women, and only 30% of Interactive Investor's customers are women.
All of this means that women are highly unlikely to trade individual stocks and are therefore unlikely to join a service like MyWallSt, so I set out to understand why women don't invest and find ways that I and the company can help to close the investment gap.
Why Don't Women Invest as Much as Men?
After some research, I determined that the causes can be split into two interconnected groupings: economic and social.
The most important economic factor is the wage gap. On average in 2018, American women made 81.6 cents for every dollar a man made and women's median annual earnings were $9,766 less than mens'. Even when correcting for differences in career path, in no occupational category do women out-earn men. So already the amount of money women can invest is limited, and then this becomes compounded by the average woman's conservative investment style. This means that, by the time they enter retirement, women have 30 to 40% less money than men and the wage gap becomes the wealth gap.
Despite legislation like the Equal Pay Act (1963), legal loopholes and cultural bias uphold the wage gap, meaning it will be decades before women earn the same as men. But women of today don't have time to wait for society to catch up with them. For women of mine and the next few generations, the most important factor is going to be our financial literacy and attitude towards risk. The origins of these can be found in our upbringing, education, and culture.
It is a commonly held belief in the financial world that women are risk-averse, which analysts use to explain why women are not interested in investing. However, recent studies have demonstrated that women are not risk-averse but rather risk-aware, meaning they want to thoroughly understand a risk before they take it. For this reason, a study from the University of California, Berkeley described women as "rational" investors.
So, we obviously need to do a better job at teaching women about investing in order to help them get over their initial hesitation and move away from their "recklessly cautious" saving style. A lack of financial education seems to stem from traditional ideas of the role of men and women in society being passed down from generation to generation. Charlotte Yonge, who launched the charity 'Girls Are Investors', states that from an early age "women are taught that the route to financial empowerment is via budgeting while men are taught about investing". This is reinforced by statistics -- only 29% of women reported that their parents showed them how to grow wealth beyond their jobs.
For this reason, many women become responsible for their own financial literacy, finding resources, and spending time building their confidence. Admittedly, this isn't a perfect solution. Women perform 75% of the world's unpaid housework, so it's entirely possible they won't have time to learn about investing. But for those women that do make the leap, the results are significant.
Only 46% of Millennial women reported feeling confident about their ability to invest, but once they start, 77% of those women feel they will be able to accumulate enough money to support themselves for life. Importantly, that risk awareness that we talked about makes women great long-term, buy-and-hold investors. According to Jean Young, a senior research associate at Vanguard, during periods of market uncertainty, women's trading volumes remain consistent while male customers' volumes increase. Those who traded more frequently on the platform ended up with lower returns than those who traded sparingly or did not trade at all.
And the results speak for themselves. Data suggests that female investors outperform their male counterparts by a margin of .78 to 2%. At Hargreaves Lansdown in the UK, women investors averaged .81% more than men over a three-year period. If they kept that up for 30 years, "the average woman would end up with a portfolio worth 25% more than the average man".
A New Dawn for Female Investing
The investment world is beginning to see change -- eToro reported a 366% rise in the number of new women investors since the beginning of 2020 -- but we still have a lot of work to do. For me, becoming an investor became much easier when I was surrounded by veterans willing to share their experiences. It humanized investing and took it down from the intimidating pedestal I had placed it upon. And that made me realize, probably the best way to get both young women and young men sustainably investing is to talk about it.
After I started working at MyWallSt, four of my friends started investing because they finally knew someone "on the inside" who could talk to them about ways to reduce risk and the benefits of compounding. If you're reading this, you probably already have a MyWallSt account and an interest in finance, so you can help close the wealth gap by talking to the women around you and encouraging them to access financial resources (like our Learn app).
MyWallSt was established to help people own their financial future but we can only do that if they find us. Investing is a way for women to fight economic inequality and make generational change, it's only right we share our knowledge.
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