The concept of ‘risk’ is a fluid premise within investing, and that which constitutes low risk for some, may not for others.
Our recent study, Transforming women’s financial futures insights report, highlighted a number of interesting findings relating to women’s attitudes toward investing.
With over 32% of the world’s wealth currently held by women, according to the WealthiHer Network, women have a big role to play in the world of investment. However, our own research uncovered significant differences in the approaches of female investors, relative to their male counterparts, particularly when it comes to risk.
Women have shown to be more risk averse, or in some cases risk aware, then men. There are a variety of factors that have contributed to this, the most pertinent being that women have historically been afforded less exposure to investments than men. Our own research at Quilter offers insight into this, with over 64% of our female clients revealing that before working with Quilter, their assets were held entirely in cash.
To qualify how risk is interpreted within investments, a portfolio of investments is typically placed into a risk category, which denotes its risk and return objectives. As such, lower risk portfolios may provide a steady, if unspectacular, return, while higher risk portfolios may generate greater returns but incur periods of higher volatility. All investments fluctuate, and clients should seek to align themselves with the risk level most palatable with their own personal circumstances.
As an industry, it is our responsibility to engage with clients more holistically and ensure they are fully appraised and educated on their investments and the wider markets. We believe that by working directly with clients to ascertain their true tolerance for risk, we can ensure that each client’s portfolio works to its fullest potential and provides returns relevant to their personal profile.
With this in mind, how should women approach risk in investing and what are the key things to consider?
There are no ‘silver bullets’ for risk
No one asset class is immune to all market conditions, and even those areas typically perceived to be ‘safe havens’ or towards the lower end of the risk spectrum may falter. A demonstration of this can be found in the 2022 UK bond markets.
Bonds, and particularly government bonds, are generally considered to be a lower-risk investment than equities or stocks. As such, defensive portfolios will typically have greater exposure to bonds (also known as fixed interest investments) and rely on their more steady return profile to add value. In a less risk-averse portfolio, the allocation to bonds will have decreased, typically in favour of equities or alternative investments such as property.
However, bond markets can become volatile, as was the case in late September 2022, when the UK’s then-chancellor, Kwasi Kwarteng, unveiled his “minibudget”. The package announced a series of unfunded tax cuts designed to stimulate growth within the UK economy but was rejected outright by the market on fears over sustainability. This led to a mass sell-off in the bond markets and sent the British pound plummeting to an all-time low relative to the US dollar.
This, though a relatively isolated incident, highlights how a conventionally low-risk portfolio may still suffer losses throughout particular market events and periods.
Navigating risk
While studies have shown women to generally favour a lower risk approach to investing, it is important to have a full understanding of the risks associated, and your tolerance to them, before deciding upon an investment path.After careful analysis in conjunction with your investment adviser, it may be that your ability to withstand, and confidence in taking risks is greater than originally expected. Therefore, a higher risk portfolio, with greater return potential, may be more suitable.
For those beginning their investment journey, there are several key points to consider.
The first is to be as aware of potential risk factors as possible, and also consider the position at which they are entering the investment cycle. While there are no ‘riskfree’ asset classes, markets are cyclical, and understanding the risks associated with each area of the cycle will help inform more prudent investment decisions and empower the investor to take calculated risks.
At Quilter Cheviot, we understand risk tolerance is a spectrum far beyond that of the prototypical risk-profiled portfolios. As such, our expert investment advisers work in tandem with their clients, to deliver a holistic approach to investing that suit both parties.