Written by Julie Anderson

Five Key Steps for Women to Secure Their Financial Future

Material gender-specific differences do exist when it comes to accruing wealth and the ultimate financial outcome of investments. It is critical for women to be aware of these differences to empower themselves and take control of their finances. This article highlights five important ways in which women can achieve superior financial outcomes for their future.

1. Start as early as possible to leverage the effects of compound growth: There are some unique challenges that women face when it comes to wealth creation. South Africa still has a median gender pay gap of between 23% – 35%, exceeding the global average of 20%. In addition to inequality in earnings, many women may elect to leave the workforce in favour of childcare for several years. These two material factors combined serve to reduce a woman’s lifetime earnings very significantly. Data from the World Economic Forum shows that upon retirement, women have 30%-40% less wealth than men (statistics from original article written in 2023).

Yet on average, a woman’s life expectancy is four years longer than men in South Africa. From a self-sufficiency perspective, it can therefore be a far more challenging financial exercise for women to both maintain their standard of living in retirement, whilst also ensuring longevity of funds for the duration of their lifetime. The most effective method for women to reduce this major disparity is to leverage the effects of compound growth to their advantage. This is the principle of accruing growth upon growth, leading to exponential earnings over a long-term time horizon. It is therefore more critical for women to start investing as early as possible. The later you start, the greater the proportion of your income will need to be contributed to achieve a necessary or desired financial goal. This principle holds true after retirement too. The later you can delay drawing an income from your investments, the longer you allow the effects of compound growth to accumulate, increasing your capital sum.

2. Don’t be deterred by stereotypes – women are in fact better investors than men: Women appear to have a higher propensity to save than men, which implies a more diligent and disciplined approach to their finances. But research shows that women are still less inclined to invest their money, a phenomenon referred to as the “investment gap.” Women may therefore tend to have far too high a proportion, or even all, of their funds held in savings accounts or low-risk investments like money-market funds. Such vehicles are very unlikely to achieve above-inflation returns in the long term, meaning that the purchasing power of their money is being eroded over time.

This is primarily due to intrinsic gender-specific behavioural biases. The field of behavioural finance shows that because of cognitive and emotional biases, individuals do not always behave rationally. These biases manifest differently in men and women and within this context, their approach to investing.

Firstly, studies have shown that women tend to be less risk tolerant than men, with risk tolerance being the degree of uncertainty an investor is willing to bear.

But women also tend to be more responsive to facts and take a more considered approach to decision-making. Notably, when women are armed with the requisite knowledge and facts around investment risk, this differential towards risk appetite tends towards zero and women become just as willing to embrace risk as men. The provision of appropriate financial advice is therefore central to this process.

But when women do invest, their investment returns outperform men’s on a risk-adjusted basis. From 2011 to 2020, Fidelity, one of the biggest asset managers in the world, conducted an analysis of over 5 million customer accounts. Their results showed that women’s investments outperformed men’s by 0.4% per annum over the period. This becomes a significant factor over the long term, again given the impact of compound growth. Fidelity’s research results are further supported by studies within the South African context. A local study (Willows and West, 2015) showed that generally, women outperformed men on a risk-adjusted basis and this differential was even more significant for women aged 60 and above.

These results are again owing to behavioural biases. Women tend to be less prone to the overconfidence bias, which can cause greater reactivity to short-term events, leading to another investing bias – that of overtrading. Overtrading has proven to have an adverse effect on investment returns over the long term. This is due to both mistimed trades (mainly a higher inclination to sell when a particular stock or the market is down, thereby realising a capital loss) and the increased costs associated with more frequent trades. Research shows that men can perform up to 56% more investment switches per year than women.

So contrary perhaps to prevailing beliefs, women have been shown to be less emotional than men in the context of making investment decisions. Women tend to take a longer-term view with a greater focus being placed on the realisation of a financial goal, as opposed to chasing short-term performance.

3. Ensure an appropriate asset allocation for your investment horizon: There’s always going to be a trade-off between risk and potential returns. Diversification is the most effective method by which to mitigate the overall risk of your portfolio and is the investing equivalent of “not putting all your eggs in one basket.” In simple terms, this is classified as allocating funds across asset classes, being (from lowest to highest risk); cash, money-market, bonds, and equities. The asset allocation decision in portfolio construction is one of the primary determinants of potential future returns. Our Wealth Managers are well versed in our global portfolio and local portfolio options, and can choose the one best suited to your individual investment goals.

Given that women may tend to be more risk-averse, it’s important to bear in mind that an investment period of five years or longer is considered a long-term investment horizon. The volatility of equities is effectively smoothed over time, and it is these growth assets that have proven to provide superior returns over the long term. Saving towards retirement may have an investment horizon of up to 40 years, there is a high capacity to take on risk over such a long timeframe. But even at retirement, the investment term may still be 20-25 years. If the objective is to maintain risk at a moderate level, this would equate to a balanced portfolio, which generally has approx. 65% allocation towards equities. This equity exposure is crucial in aiming to achieve above-inflation returns and extend the longevity of your capital base.

4. Reduce concentration risk to South Africa with offshore opportunities: For South African investors, diversification across geographies and currencies is another key consideration. The total market value of companies listed on the JSE accounts for approximately 1% of global market capitalisation. Investing in global assets enables investors access to a much vaster investment universe with high-growth potential.

Externalising funds offshore to invest in global instruments will reduce an investor’s concentration risk to the South African economy and political uncertainty. Additionally, holding an investment in a hard currency will assist South African investors to protect the purchasing power of their money by serving as an effective hedge against the depreciation of the Rand. Over the past 10 years, the Rand has depreciated by almost 7% against the Dollar per year. Individuals can utilise their R 1 million discretionary allowance or R 10 million foreign investment allowance per calendar year to transfer funds offshore for investment purposes.

Markets have admittedly had a very turbulent few years, firstly with the onset of Covid and then the Russian-Ukrainian conflict. Both anomalous events served to compound the effect of highly elevated global inflation, necessitating one of the swiftest interest rate hiking cycles in decades. But economic indicators point towards a positive outlook and strong market recovery over the next two years for global markets. Many opportunities exist where offshore valuations remain attractively priced, meaning that the shares are trading at a discount to their intrinsic value. If your current holdings are too conservative, or if you are looking to diversify further offshore, significant potential exists for strong upside gains over the next few years.

5. Seek professional advice to ensure a cohesive financial plan: Fidelity’s study also revealed that 77% of women would feel more confident about their financial future if they had an advisor to help them. It’s clear that the services of a wealth manager play a pivotal role. A professional can provide guidance through the various complexities, gain a comprehensive understanding of your unique circumstances to devise an investment strategy to match your personal situation, risk profile, life stage, and financial goals.

However, one’s investment approach shouldn’t be viewed in isolation. Tax and estate planning are other essential considerations that will impact one’s financial position that falls under the broader ambit of financial planning. A professional can ensure that the financial structure is as tax efficient as possible, otherwise, any potential outperformance in returns may be lost due to unnecessary taxes. The implications of both local and offshore taxes may need to be contemplated. An estate planning exercise is also crucial to ensure your assets will be distributed effectively. Specialised offshore vehicles are available which enable both tax efficiencies and swift succession to heirs.