Saturday, March 1, 2014
Financial literacy – women understanding money,
The following is taken from an article published in the Women s Agenda from Australia and from Benefits Pro.
In Australia, all workers contribute to a pension plan called Superannuation.
Superannuation is predicated on time spent in employment, and the gross income of each member. So while the current median super balance of men aged 35 to 44 is around $41,000, for women of the same age it's $22,600. For those about to retire – 55 to 64 year olds – men have a median $91,000 compared to women with $55,000.
The problem isn't so much gender bias as structural inadequacy.
Women have different lives to men. They typically take time out to have kids, they work part-time when they re-enter the workforce, and in order to have flexibility with their family responsibilities, they often work on contract from home or they do informal work for cash. All of these choices take contributions out of their super.and other savings than men. And yet the great paradox is that they actually make better investors than men, so what's going on and how can it be addressed?
The Australian Government's study, Financial literacy – women understandingmoney, (PDF file) highlights a raft of differences in the attitudes, confidence and actions of women and men. Women are less confident with planning for their financial future and ensuring they have sufficient money in retirement. Significantly, 52% of women said that dealing with money is stressful and overwhelming. Many said thinking about their long-term financial futures makes them feel uncomfortable. Thirty four percent said that dealing with money is boring.
But that is only part of the story: it turns out that women actually make better investors.
A recent study by USA consulting firm Rothstein Kass, found that hedge funds led by women far outperformed the global hedge fund index in 2012. In fact, hedge funds run by women made an 8.95% return while the global hedge fund index returned 2.69%. That's well over three times higher returns compared to male-led funds.
The great American investment guru Warren Buffett is a legend due to his high investment returns over many years, and his home-spun philosophy. In August, his Berkshire Hathaway company reported a 46% increase in profit over the previous year.
Louann Lofton's recently published book Warren Buffett Invests Like a Girl: And Why You Should Too, is getting plenty of attention in the USA. She says that his success is partly because he exhibits many of the traits of women investors. Research studies have shown eight particular traits of female investors versus their male counterparts. These include exhibiting less self-confidence, trading less, being more risk averse and being more willing to learn from their mistakes.
So if women possess traits that potentially make them more successful with money and investment than men, why are they less confident in planning their financial futures? Why do they find dealing with money more stressful?
Australian-based research released in September as part of Smart Money Week, shows that family and relationships have a significant influence on most women's approach to personal finance.
"Our research confirms that gender very strongly shapes financial decision-making and well-being" said the leader of the study, RMIT's Professor Roslyn Russell. Women are very articulate about what they would like to do and achieve, but there is a gulf about how they are going to get there. Another thing important to consider, and why we need a special program for women, is that women don’t talk about themselves for financial security; they talk about the family. … There is often a lack of savings because women might be thinking or planning more for their children’s education instead of taking care of themselves. Women, in other words, are far more focused on taking care of others than they are on satisfying their own needs.
"Several women allowed all large financial decisions to be made by their partner or spouse, and in many cases this put them at significant disadvantage."
Professor Russell says that while financial literacy is important, it is not enough on its own to motivate women to make changes to their financial management habits.
So how do we address this conundrum? Perhaps we need to look at approaches that work well in other aspects of our lives.
Education is - as always - a great asset and a great enabler. Along with increased knowledge and skills, it engenders confidence. In addition to financial education, perhaps women should actively seek support and guidance from other women who are more experienced in finance and investing.
Aggravating matters, women’s low financial literacy and confidence keep them from seeking advice from, say, a financial advisor.
“People who are not comfortable or do not know,” said Lusardi, (Annamaria Lusardi, the Denit Trust Distinguished Scholar in Economics and Accountancy at GeorgeWashingtonUniversity) “will be less likely to use an advisor because they might not understand or be able to follow the advice they get. It’s the same as with health. I have heard so many times that women talk to the doctor and feel they are not listened to. They might think the same thing will happen with financial advisors, and then they will not consult one.”
Mitchell (Olivia Mitchell, International Foundation of Employee Benefit Plans Professor at the Wharton School of the University of Pennsylvania) and Lusardi both said that better financial literacy, beginning as early as possible, is one key to improving women’s savings rate for retirement. Education about the importance of the employer match in retirement plans is critical, said Mitchell, and for employers that still offer defined benefit plans, women need to learn what a lump sum vs. a lifetime payout can mean to them.
Women mentoring other women - in their careers, in entrepreneurship and running successful businesses - is now commonplace. Perhaps we need to look at the mentoring of women by women in money, attitudes, skills and investing to address the unpalatable facts that they retire with far less superannuation and other savings than men, and are more likely to rely on the age pension
As offensive as the idea might sound, women’s financial literacy is simply not as good as men’s. And that’s true, Mitchell said, across the globe, not just in the U.S. Citing the results of a global study that asked “very simple questions in about 25 different countries,” she said, “we have a pretty global picture of financial literacy differences.” And they are legion.
“Women are less likely to understand compound interest, which is central to things like credit cards, mortgages, student loans — you name it,” she began. They’re also “slightly less informed about inflation — there’s not too much of a difference there, but they’re (also) much less aware of risk diversification. That would lead women to put too much money into a single asset: a home, for example, and not to diversify across different categories.”