Women And Risk Tolerance: A Modern Perspective by Barbara Stewart

Barbara StewartA couple of months ago I was in a Canadian bank branch and I overheard an exchange between a junior financial advisor and a young couple that were setting up an investment account:

Advisor: “What is your risk-tolerance?”

Woman: “What do you mean by that?”

Advisor: “Well that’s a bigger conversation that is probably best left for another day. How about we just say conservative for now?”

Woman: “Umm. OK I guess”

Now maybe I’m a bit cynical after way too many years in the investment industry but I had the sense that there would be no further discussion ‘another day’ on the topic of risk tolerance. But there should be.

What Is Risk Tolerance?

According to Wikipedia: “Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.”

How Do You Acquire This Realistic Understanding Of Your Willingness To Tolerate Risk?

In my experience working with private clients for over 20 years, this type of self-knowledge can only be learned via the school of hard knocks. You earn your risk-tolerance badge by observing yourself and your behaviour over many many years of actual investing. Follow movement. What did you do to your portfolio when the going got tough?

In most cases, actual risk tolerance is very different from what most people guess about themselves in advance. Some think they have high tolerance…and they don’t: “Sell it all, the market’s down 15%!” Others turn out to handle volatility much better than they would have guessed before they got started.

How do you assess your risk tolerance if you have never invested before?

  1. You try your best. And/or
  1. Hopefully you find a psychic investment advisor.

Let’s go back to our bank branch scenario. Was the advisor wrong to check off the conservative box? He didn’t mean any harm and he thought he was playing it safe since there was no other information to go on. But either way, what qualifies him to make this assessment?

Jason Voss is the CEO at Active Investment Management (AIM) Consulting based in Sarasota, Florida. In his 2017 blog for CFA Institute he discussed the confusion around the issue of risk assessment and the serious implications for investors:

“…suitability is an emotional assessment of clients — and a poor one, at that — not a risk assessment of their portfolios.This is an absolutely critical distinction. Suitability legitimizes the construction of low-return portfolios for temporary peace of mind and consequently denies clients substantial long-horizon wealth.”

When we talk about risk tolerance, the common assumption is that the risk we are tolerating is short-term market volatility. But the real risk is when longer-term investment objectives are not met. In my view, we need to have a much broader conversation.

What Would A Bigger Conversation About Risk Tolerance Look Like?

Assuming that you don’t have a history of investing, a good place to start the conversation (with yourself or with your advisor) is to make some assumptions about how you might behave as an investor based on your previous life experience with other forms of risk-taking.

What are some of the risks you’ve taken in your life? Why did you take those risks? What happened? How did you feel along the way? How did you respond?

From the interviews that informed my 2018 study “Smart women and risk-taking” it became clear to me that risk is a relative concept. Risk is relative both to the personality of the risk-taker and also to the environment at the time of the risk-taking. Both men and women have their own personal mix of risk-avoiding and risk-seeking tendencies. More importantly, how much risk anyone will take is based on how aware they are of all of their options in any given context.

Risk tolerance is shaped more by life experience, personality, education, and situational factors than by gender.

Women Aren't Risk Averse, They Are Risk Aware

Historically in the investment industry, people who said they were the most risk averse were told to own a lot of cash and bonds, and to avoid stocks, while those who said they were risk tolerant were advised to own more stocks. In this way, investing in equity markets was seen as a proxy for risk tolerance.

Men did tend to own more stocks decades ago, and were therefore seen to be less risk averse than women: we come by the old stereotype honestly. But time’s up for that cliché!

Let’s look at the numbers:

Thirty or more years ago, about 60% of US men invested in stocks while only 40% of women did, leaving an “investment gap” (at least when it comes to stocks) of about 20 percentage points. According to a 2017 Gallup survey “Stock Ownership Among Americans”, the gap is now smaller and narrowing fast.

In the pre-crash period of 2001-2007, 55% of men and 49% of women owned stocks for a six-point gender gap, and by the post-crash period of 2008-2017, 56% of men and 52% of women were investing, for a gap of only four percentage points. My bet is that by 2025 there will be no meaningful gender gap in stock market participation.

My research has shown that women are risk aware. Whether we are talking about investing in a new venture or the stock market, as long as a woman is interested and an opportunity is aligned with her values, she will be motivated to take a risk. She might take more time to make an investment decision but this is because most women are meticulous about doing their homework. Once they have delved into the details to their satisfaction, they will take calculated risks and invest.

Own Your Own Risk Tolerance!

Ashvin Chhabra is the Author of The Aspirational Investor and President of Euclidean Capital in New York. Here is an excerpt from Chhabra’s quote in my 2016 research paper:

Markets are anchored in disagreement so your investment strategy must be based on differentiating between what you can and cannot control. It is time to a) get clients and advisors on the same page, b) be willing to look at the deeper meaning of what needs to be accomplished through investing, and c) make sensible decisions on that basis.

…the future is about ‘know thyself.’ The role of the sophisticated advisor will be less about finance and much more about having the skills to assess complicated problems that people face and being able to translate them in a cohesive way to a system of investing that makes sense for each individual.

I look forward to the day when advisors at bank branches are sophisticated enough to understand how to use finance, data analytics, sociology, and psychology to make an accurate suitability assessment. But ultimately it is always up to the individual investor to dig deep and figure out how they can manage their emotions during short-term market fluctuations. It is only then that will they able to focus on what matters – a sensibly constructed investment portfolio. After all, the whole point of investing is to build long-term wealth.

In 2019 and beyond, when it comes to women and risk tolerance, smart advisors will take the time to broaden the conversation with clients (of any gender)…and smart clients will have internal conversations about risk.

As Chhabra suggests: “investor know thyself.”


Barbara Stewart, CFA is one of the world’s leading researchers on women and finance. Barbara is an advocate for women, for diversity, and for financial education, both in public and as a consultant using her proprietary research skills to help global financial institutions seeking to transform themselves. Barbara is a frequent interview guest on TV, radio and print, both financial and general interest, as well as a former columnist both in print and online for Postmedia newspapers in Canada. Barbara is a contributor to the CFA Institute’s Enterprising Investor website. For more information about Barbara’s research, please see www.barbarastewart.ca.