Why Are Women Less Risk Tolerant Than Men?

They keep funds in accounts with low returns to buffer negative income shocks

401k, women, retirement, risk toleranceToo many uncertainties, apparently.

Let’s be clear, they said it, not us.

Life events such as childbirth, child care and care-giving often contribute to women’s income uncertainty, which makes them less risk tolerant than their male counterparts, according to research from the University of Missouri.

It squares with prior research, which has long shown that women are, on average, less risk tolerant in their financial decisions than men.

It’s a concern, as investors with low levels of risk tolerance might have greater difficulty reaching their financial goals and building adequate retirement wealth because they are unlikely to invest in stocks.

However, it’s not the thinking behind risk tolerance that’s different per se, it’s the income uncertainty which affects men and women differently.

“It is important to understand what causes them to be less risk tolerant so that financial planners can better serve their needs as women, on average, live longer than men and often need more retirement savings,” Rui Yao, an associate professor of personal financial planning in the MU College of Health and Environmental Sciences, said in a statement.

For her study, Yao examined data from the Survey of Consumer Finances. By analyzing data from nearly 2,250 unmarried American individuals, Yao found that women are more likely to have uncertain incomes from year to year.

Yao also found that, on average, they had lower net worth than men. This may have resulted, in part, from women keeping funds in accounts with low returns to buffer the risk of negative income shocks.

One-quarter of women and one-fifth of men in the sample reported using a financial planner for saving and investment decisions, but the advice given to women may not be in their best interest.

Yao suggests that financial planners need to understand the differences in income uncertainty and net worth between men and women and the way in which these differences relate to risk tolerance.

“Simply telling them to be more risk tolerant is ineffective,” Yao added. “In fact, it might encourage women to take more financial risks than they can tolerate, which could lead to more problems in the future. The difference in investment advice received by men and women requires further investigation, particularly given the new fiduciary standards for financial advisors.”

Yao’s advice is to plan for income uncertainty by creating a financial strategy that fits their needs.

For example, when anticipating child-rearing or care-giving periods in the near future, they can and should be more conservative in their investing. When those periods are coming to an end, they should work with their financial planners to make riskier investments.

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