As a woman, should I be following a different investment strategy to my male counterparts?
Let’s face it. Money matters. Managing your money wisely is a prerequisite for financial comfort.
The principles of investment planning—starting early, having a long-term plan and investing regularly are the same for men and women. So, why do women have special investment needs?
If you look at the life patterns of women, you’ll see that:
- Women tend to live longer than men
- Their careers are interrupted by family needs
- More often than not, women prefer a conservative investment strategy.
Given inflation and the many responsibilities they have taken on, as well as the high aspirations they have, there is a compelling need for women to take charge of their financial planning.
Your financial picture
The three most important aspects of your personal financial picture are:
- Your risk tolerance
- Your time frame
- Your personal circumstances
What is your risk tolerance?
Your ‘risk tolerance’ is basically your comfort with an investment option. The risk spectrum ranges from ‘safe’, with little risk of loss or volatility (like a money market fund), to very ‘risky’, volatile investments (some equity funds or sector funds).
You need to determine your own comfort zone. For example, if you don’t like to be awake all night wondering about your investment, you can invest in moderate risk funds managed by professional fund managers.
Also, you need to keep in mind inflation and taxes. With the so-called safe but low return investments, you can actually end up worse-off when these two are taken into account.
Your time frame
When we talk about an investment’s time frame, we mean the time between when you make the initial investment and when you’ll need the money.
If you start an investment with the goal of paying university tuition for a two-year-old child, you’ll need the money starting in about 16 years. If that child is 15, you’ll need the money starting in about three years.
Every investment has its own time frame depending on your goal and life stage. And the time frame can change as the goal approaches.
Knowing where you are in life stage will determine what type of investment strategy you should use.
Your Net Worth
At a minimum, your financial picture should show you how your assets stack up against your liabilities. In other words, if you had to pay off everything you owe right now, how much would be left over?
- Your assets. Make a list of everything you own that has monetary value. Beside each item, write what it’s worth in cash. The list should include investment assets like stocks, bonds, CDs and mutual funds. It should also include property such as your home or other real estate, vehicles, jewelry, art and antiques. Add the amounts in the list to determine the total value of your assets.
- Your liabilities. A list of liabilities will include all your debts and the amount owed for each one. The bond on a home is the largest liability for many people. Other debts include credit card balances, unpaid bills and car loans. When the list is complete, add those numbers to get a rand amount for your total liabilities.
- Your net worth. Subtract your liabilities from your assets and the resulting amount is your net worth. Ideally, your net worth will be a positive number, but it’s possible to have a negative net worth if liabilities exceed assets. This figure is the basis for your financial picture and will help you determine how much you need to invest to meet your financial goals.
How much am I worth?
Do a proper review of your assets and liabilities, which will help you in arriving at your financial worth (or net worth).
Selecting Your Asset Mix
Asset allocation means dedicating certain percentages of your holdings to broad asset categories like stocks, bonds, real estate and cash as a way to achieve your financial goals while managing risk.
This strategy can work because different categories behave differently. Stocks, for instance, offer potential for both growth and income, while bonds typically offer stability and income. The benefits of different categories can be combined into a portfolio with a level of risk you find acceptable.
What allocation is right for you?
Asset allocation helps investors balance the returns they want with an acceptable level of risk. Your asset allocation should be based on your investment goals, time frame, and risk tolerance.
In retirement, you might want to emphasize bonds and cash for income and stability. But don’t overlook stocks, because you need to keep up with inflation.
If you won’t need your money for 25 years, a financial advisor might recommend an asset allocation of 100% stocks. That wouldn’t mean investing in only one stock. You’d still want your portfolio to be diversified across a variety of stocks.
Preparing for emergencies
When considering your asset mix, don’t forget to set aside money for emergencies. Life is full of situations such as serious illness, job loss, and divorce for which it’s hard to plan. So, it’s wise to put aside cash reserves for the unexpected. Aim to build an emergency reserve which can sustain you for three to six months.
Help with selecting your asset mix
Before investing, one needs to understand the various investment options thoroughly. If you think you do not have time or expertise to manage your money, leave it to professional fund managers like mutual funds.