Charts of the day, female risk-aversion edition
Catha Mullen of Personal Capital, an online wealth-management company, has an intriguing post about what she calls â€śgender bias in investingâ€ť. Looking at the Personal Capital user base, she found that â€śwomen are on average 7% more risk-averse than menâ€ť, and that â€śthe effect of gender on risk tolerance is greater than that of any other variableâ€ť â€” bigger even than net worth.
Because Mullenâ€™s multivariate analysis table is quite hard to read, I asked her to generate a couple of histograms for me. Here are the results:
In both cases, risk tolerance is based on Personal Capitalâ€™s five-point scale, which runs from 1 (â€śMarket volatility makes me very uncomfortable. Safety is a much higher priority than growth for me, and I do not expect growth meaningfully above inflationâ€ť) to 5 (â€śI am willing to take a high degree of risk in pursuit of higher returns, and am very comfortable with the volatility of a 100% stock portfolioâ€ť). Iâ€™ve also stripped out the data for people with net worth over $5 million, since the dataset there seemed to comprise one man and zero women.
Overall, calculates Mullen, women will end up with roughly 10% less money at retirement, thanks to their higher risk aversion. Maybe that explains why Warren Buffett, in his will, isnâ€™t giving his wife cash, but instead is setting up a trust for her which is 90% invested in stocks. But I donâ€™t think that Mullenâ€™s findings counteract the generally-accepted fact that women are better investors than men.
The biggest story in these charts can be found at the far left, among the young and the relatively impecunious. If youâ€™re a woman between the ages of 18 and 30, or if youâ€™re a woman with a net worth of less than $100,000, then youâ€™re a lot more risk-averse than a man in the same position.
This risk-aversion could well be entirely sensible. If youâ€™re just saving for retirement, then it makes sense for younger and poorer people to maximize their risk appetite: you have relatively little to lose, while a nice gain early on can give you an unbeatable headstart later in life. But the fact is that most of these people are probably not saving for retirement: they have more urgent expenses to deal with first, like the costs involved in buying a house or raising a young family. In that case, it makes sense to be relatively risk-averse.
Itâ€™s also interesting that the richer men get, the closer they get to how a similarly-situated woman would invest. Youâ€™d think that risk tolerance would rise with net worth, but in fact it doesnâ€™t: once you have a decent nest egg, it turns out, you start concentrating more on how to keep it and less on how to grow it. Thatâ€™s one reason why Suze Orman puts nearly all of her money into wrapped and triple-A rated zero-coupon municipal bonds. She can live extremely well on what she already has, so the most important thing is to retain that wealth, rather than bear any risk that itâ€™s going to disappear. (Interestingly, Nassim Taleb has a very similar investment portfolio, although he takes a lot more risk with the 10% of his money which he puts at risk.)
In general, people filling out investment questionnaires tend to overestimate their own risk appetites â€” which implies that men are taking too much risk, and that theyâ€™d be better off behaving more like women. A good investment advisor knows to invest her clientsâ€™ money more cautiously than they say they want; the lesson of Mullenâ€™s data is probably that she should bring the risk down more for men than she should for women.