International Women’s Day has rolled around again and this year’s theme is “Break the Bias”. But while a theme generally provides a focus for the debates, we’re not sure this is possible with this year’s theme, and that’s not just because of the level of bias that continues to affect women.
Although significant progress has been made in recent years, as a result of various societal biases, women around the world continue to be paid less (on average) than their male peers. They also invest less. Together, the effects translate into lower levels of investments, pensions and savings, preventing women from fulfilling their wealth goals.
It’s also worth flagging, meanwhile, that men are not the only ones guilty of projecting bias. According to United Nations’ research published in 2020, just under 90% of men and women hold some sort of bias against women.
However, while we cannot wave a magic wand and achieve financial parity, we can help women (and men) achieve more through the advice we, as wealth managers, provide our clients, which sees us breaking down behavioural biases. Research has tallied over 180 cognitive ‘subjective realities’, which have become common because they stem from a fundamental factor for any investor – we’re human.
But while the regular balancing of intuition and logic in our day-to-day decisions gives a sense of comfort in our choices, and leads us to develop (and rely) on a gut feeling for things, we should all be wary of trusting our initial instincts for financial evaluations. Why? Because we simply don’t make enough of these decisions on a regular basis to take this shortcut.
And while you’ll be delighted to read that we are not going to go into all 180 biases in this article, it’s worth articulating three we regularly see:
This is where people are unduly influenced by what others are doing, rather than thinking rationally for themselves. Think of how often FOMO (the fear of missing out) has been cited across age groups. One of the most famous examples of herd behaviour in the investment world was the dot-com bubble. The late 1990s was a time of rapid technological advancement and many companies were seeking to commercialise the opportunities it offered. Investors poured money into new internet start-ups because everyone else was doing it, even though many of these companies lacked sound financial business models and had failed to generate any revenue, let alone turn a profit. Between 1995 and its peak in March 2000, the technology-dominated NASDAQ Composite Index rose 400% to an all-time high, but by October 2002 the market had lost more than 75% of its value, giving up all the gains created in the bubble.
Cost of reluctance
People have a tendency to keep more money in cash than they really need. While it makes sense to keep some money instantly accessible (e.g. in case of emergencies), many have too much in hand because they haven’t calculated how much they actually need, but also because many try to time the market. This may even be inadvertent. However, this is never a great strategy partly because it effectively could reduce overall investment performance, as cash generally yields less than many other investments due to its association with the lowest levels of risk, but also because many of the worst days in financial markets are closely followed by the best. By the time you finally get your money invested having seen the market fall, you may already have missed an initial rebound.
Investors often view any new information through a lens that only focuses on reaffirming their existing beliefs, rather than as a catalyst for change. So, for example, as markets start to dip after a long period of upwards momentum, they don’t act. They want to believe that the markets will go back up and the drop was only a correction. They subconsciously shield themselves, meanwhile, against any information that could show the situation to be contrary to that view.
But, while these biases can be difficult to avoid falling foul of, there are also ones that you can seek to overcome yourself. For example, despite the rise of wealth among women that we have generated for ourselves (and our families), and even though many women are primarily responsible for household finances, it’s still too often the husband managing any borrowing, investments and wealth plans.
Aside from the empirical data that shows women are more likely to outlive their partner, and that becoming more familiar with all aspects of finance should hold you in good stead, there is considerable evidence that women achieve higher portfolio performance than their spouses. According to analysis by Warwick Business School, women outperformed men at investing by an average of 1.8% over three years.
There’s also another bias that can quickly be broken. Despite the prevailing views that seek to call out women as more likely to be emotional than rational beings, research studies are divided on whether investment biases affect women more than men. It turns out we are all driven by a ‘feeling’ more often than we’d like to admit. We can’t stop being human, but we can determine how we can appease our emotions without it costing us a fortune or procrastinating so long that we limit the time we could spend in the market. By acknowledging a behaviour, how and when it affects you, you could eventually learn to better manage your inner self, which should in turn help you achieve your wealth plans, regardless of gender.
And we can help – whether it’s showing you how to take some of your emotions out of investing, or giving you the opportunity to avoid herd investing, given our contrarian approach to home bias versus other UK wealth managers. Either of which should be worth an initial call.
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Sources: Nedbank Private Wealth; United Nations; YouGov Research; and Warwick Business School
Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Nedbank Private Wealth does not provide individual tax advice, and instead works with clients’ existing advisers or can provide an introduction if needed. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.