The battle of the sexes has long had a familiar theme when it comes to investing: Women invest more cautiously while men save more, but take bigger risks.
Times are changing, though, and with it has come a thinner gap between how men and women save for retirement. Now, “women are generally model investors,” while men still take unnecessary risks, says Steve Utkus, who heads Vanguard Group’s Center for Retirement Research.
Vanguard’s report outlines how men and women contribute to a defined contribution plan, or a 401(k). While the data shows that women generally do better than men when it comes to proper investing practices, fewer differences persist.
But what’s right and wrong with the strategies? We take a closer look, outlining how you should tackle the issue in your own retirement plan.
Women are more likely to participate. One of the tricks of investing with a 20- to 30-year time horizon is creating ways to ensure your contributions remain steady. Keeping money flowing into your account will help grow your returns by the time you’re ready to tap the funds. Plus, you feel the short-term impact the least when it’s taken directly out of your salary before you cash the paycheck. But you can’t do that unless you’re participating — and more women take the initiative to do just that.
According to the study, 66 percent of women participate in 401(k) accounts with voluntary enrollment, compared to just 58 percent of men.
“Some people are worried about 401(k) fees and some indeed are quite high,” but that shouldn’t deter you in most cases, says Linda Stratton, a financial planner from Stratton Advisors, located near Tucson, Arizona. “You’re almost automatically losing money because of the tax write-off [by not investing].”
You don’t have to pay taxes on the funds that go into a 401(k) until you cash out. The tax-deferred earnings can have “power over 20 to 30 years,” Stratton says.
Fees certainly should be a concern for those looking at their 401(k) heading into 2016. While most companies ensure a mix of low-fee, well-diversified funds, sometimes that’s not the case. In those situations, it may be better to hold off on the 401(k), and invest in a Roth IRA instead.
But since most companies offer a match of some sort, at least contributing the level to get the full match from your employer makes sense. Part of this lack of participation has started to fix itself since the implementation of automatic enrollment. Vanguard found that 89 percent of men and women who were automatically enrolled participated in a plan.
Some men take more risks. There’s a misconception that women take less risk than men, at least in defined contribution plans. This isn’t necessarily true anymore. The growth of target-date funds, or a fund that slowly moves the assets to more conservative allocation as one ages, has dramatically changed the amount of equities that women hold in their accounts.
Now, there’s very little difference between what most men and women hold. That’s because 42 percent of women in a defined contribution plan have a single target-date fund, compared to 36 percent for men. Target-date funds typically hold anywhere between 80 to 90 percent stocks when you’re still decades from retiring.
The problem for men comes at the outliers. With 11 percent of them trading within their contribution plans, it’s a sign that they tend to be “more trigger-happy,” says Chip Hymiller, a financial planner from Beacon Financial Strategies in Raleigh, North Carolina. When something starts to turn down, they’re quicker to find a better-performing asset. But this only forces them into the more expensive option, leaving men without the benefit of upside. In a diversified portfolio, you’ll usually “have something underperforming,” says Hymiller, which is a protection in case something reverses in the economy.
The belief that you will correctly pick a specific trade grows if you got it right before. But the actual likelihood that you will time the trade correctly remains very low.
Men have more saved. The biggest difference between the saving habits of men and women has to do with the amount saved. Men have more, but that’s only because men have higher incomes. Whether it’s because average salaries for men are higher or that men, as a whole, have fewer breaks in their career, the wages are higher, which leads to the differences in total savings.
But when accounting for specific income levels, women save at a higher rate. For employees making more than $100,000, women save 9 percent while men save just 7.9 percent. But if that’s all these men and women save, then they should increase their rate, Hymiller says. Saving at least 10 percent over 30 years will almost ensure a comfortable retirement, although he prefers to see rates of 15 to 20 percent.
For those making a little less in income, that’s the only way to really catch up. Finding strategies to reduce spending so you can save at a higher rate will have benefits over time. “A percentage more, especially if you’re a younger person,” can have dramatic impact after 20 years, Stratton says.
The differences are declining. What’s most telling about the continued research into differences between men and women investors is that there are fewer and fewer differences, especially if you take out the outliers. Due to the growth of financial literacy, a reduction (although slow) in wage differences and increases in target-date funds have decreased the many bad behaviors that both sexes have had in the past.
“Is it time to start talking less about men or women as opposed to bad and good behaviors?” Utkus says. “These male-female differences are narrowing.”
They’re characteristics, in general, that Hymiller and Stratton still see in clients. Yet, controlling the actions that are produced from these differences could be the key to smart investing. “Saving and investing works best when it’s habitual,” Stratton says. “It’s a lot like flossing your teeth — kind of boring, but necessary to your health.”
That’s true, no matter if you’re a man or a woman.
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Who Invests Better: Men or Women? originally appeared on usnews.com
