Women & Cash - Is Holding Too Much a Good Thing?
It’s well known that women, on average, live longer than men, but did you know that women are fairly conservative with their money? A study from Blackrock found that women hold 71% of their wealth in cash vs. 60% for men.(1). Surprising? No, not if you think about it. Historically, women tended to have less financial security than men so it’s not surprising women are more careful with their money. However, holding too much cash limits wealth growth in the long run, and wealth creation is particularly important for women as they face additional financial challenges that men generally don’t.
But Wait a Minute, Cash is King, Right? It Provides Security.
Yes, cash does provide security, but the cost of holding it goes beyond lack of growth. With inflation currently hovering around 5%, you are also losing purchasing power if your money isn’t earning more than the current inflation rate. In other words, in addition to forgoing growth, holding cash may actually be costing you money…a double whammy.
Let’s look at a scenario that shows the impact of inflation and investing:
If you had $100 in a savings account in 2000, it would now be worth around $60 (2)
If you had invested $100 in the S&P 500 in 2000, it would now be worth a little more than $450 (3)
Whether you’re a young investor or already thinking about retirement savings, the growth of your investments needs to be considered as carefully as maintaining what you already have. While holding cash may seem like a safe strategy, too much of it can hurt purchasing power, long-term returns, and growth. If you’re looking to build wealth and grow net worth, cash is like a hole in a boat’s sail.
How can you begin to flip the script?
Creating an Investment Portfolio That Works for You
A good investment strategy aligns with your goals, values, risk tolerance, and time horizon. The growth received from a properly constructed portfolio also sustains purchasing power during inflationary periods and prepares you for the future. There are some basic principles that apply across most portfolios.
Diversification
A common way to reduce some of the risk that comes with investing is diversification. To put it simply, diversification is the act of spreading out your investments across different asset classes or even within asset classes. Since different investments can react differently to the same economic conditions, diversifying your investments can reduce volatility and smooth investment returns. The classic example is to hold both equities and bonds, as they usually react differently in the same set of circumstances.
For example, when the economy creates a difficult environment for equities, investors looking for safety reduce risk by moving out of equities and into bonds. This pushes bond prices up and equity prices down. There are many ways to incorporate diversification into an actively allocated portfolio, and they can reflect your preferred risk parameters.
A Long-Term Mindset
It’s essential to invest for the long term as you’re creating a nest egg to last through retirement. Long-term investing allows you to experience compound interest - which is where your returns continue to earn money on previous returns. You will have down periods, but a good long-term strategy can recover and go on to reach higher values.
A Fidelity study found that one reason women investors outperformed their male counterparts by 40 basis points is that women are long-term investors. (4) They don’t tend to make short-term “bets”. In fact, the study found that men were 35% more likely to make trades than women were.
Cash Has Its Place
Cash does have a proper place in a well-rounded portfolio. Every dollar you have saved doesn’t need to be invested. Emergencies can happen at any time so it’s recommended to keep a few months of personal expenses in cash, outside of investments, in a high-yield savings account. However, after that, start putting your money to work for you.
The Takeaway
Women are good investors. They understand the importance of saving, doing research, making a plan – and sticking to it. When considering how much cash to hold, think about the tradeoffs between the safety cash provides with losing growth and offsetting inflation. Doing so will help you find the right balance.
(1) ThinkAdvisor, Blackrock: women and men look at money, investing differently. Thinkadvisor.com. March 8, 2016.
(2) Webster, Ian. CPI Inflation Calculator. In2013Dollars.com. November 5, 2021.
(3) Webster, Ian. S&P 500 Data. Officialdata.org. November 5, 2021.
(4) Dore, Kate. Women Investors Are Still Outperforming Men Study Finds. CNBC. October 11, 2021
Pamela Chen is the Founder and Chief Investment Officer of Refresh Investments LLC, a fee-only financial planning and investment management firm located in Santa Monica, CA serving clients throughout the great Los Angeles area and the United States.
The information provided in this article is for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Refresh Investment’s views as of the date of this presentation. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessary come to pass. Refresh Investments does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Refresh Investments has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other Web Sites maintained by third parties over whom Refresh Investments has no control. Refresh Investments makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Refresh Investments is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Refresh Investments.
