Who Really Knows How To Invest?

While many people want to invest, a large proportion of people don't know how to start. According to a Stash survey, 90% of Americans want to build wealth, but almost half don't know where to begin. A separate survey by MetLife found that over half of Americans (55%) don't participate in the stock market, with younger generations opting out in greater numbers than older Americans. A NerdWallet survey also found that many Americans don't know the types of investments they have in their accounts.

Gender differences in investing

While there are many people who do not know how to invest, there are also gender differences in investing. Various studies have reported gender differences in investment behaviour. Here is an overview of some of the gender differences in investing:

Women are more conservative investors

Women tend to be more conservative when investing and are less willing to take risks than men. This means they are more likely to choose less risky investments with lower potential returns. This could be due to a lack of financial knowledge, as studies suggest that women are less knowledgeable about money matters and investing than men. As a result, women may need different financial products that are better suited to their risk tolerance and return expectations.

Men have a higher risk tolerance

Men generally have a higher propensity for risk-taking when investing. This means they are more likely to invest in riskier assets such as stocks, derivatives, and mutual funds. This could be due to overconfidence, as some studies suggest that men are more optimistic about their investment choices, which leads them to take on more risk.

Marriage and motherhood impact women's retirement savings

Women who have been married and/or have children tend to have lower retirement savings than men or unmarried women. This could be due to time taken off from work or part-time work, which can impact their earnings and, consequently, their retirement savings. The wage gap also plays a role, as mothers between the ages of 25 and 34 earned only 85% of what fathers in the same age group earned, according to a 2022 Pew Research Center analysis.

Women lack confidence in investing

Women generally have lower confidence when it comes to investing. For example, only 33% of women see themselves as investors, according to a 2022 SoFi Women and Investing Insights analysis. This could be due to a lack of financial literacy, as women tend to score lower than men in financial literacy, which makes them less likely to save and plan for retirement.

Men are more likely to invest in mutual funds and stocks

Men are more likely to invest in mutual funds, index funds, and stocks than women. This could be due to the higher risk tolerance of men, as these investments are generally considered riskier but can also offer higher potential returns.

Overall, there are significant gender differences in investing behaviour, and these differences can have a substantial impact on the financial well-being of individuals, especially in the long term.

Young Americans are less likely to invest

Younger Americans are less likely to invest in the stock market than their older counterparts. A Gallup poll found that only 37% of those under the age of 35 invested in the stock market in 2017 and 2018, down from 52% in the two years leading up to the 2008 market crash. This trend is also seen in the older age brackets, with 66% of those over 35 investing before the crash and 61% investing after.

The 2008 market crash and the market's latest volatility are the main reasons for this shift. The Dow Jones fell more than 50% from the end of 2007 to mid-2009, causing stock ownership among young people to steadily decline in the following years. While there was a slight rebound in recent years, with 43% of young adults owning stocks in 2015-2016, the past two years have seen another drop as the market showed strong growth but also significant volatility.

Young Americans' wariness of the stock market may also be due to a fear of losing money. The stock market is perceived as a risky investment, and many young people may prefer to keep their money in savings accounts or invest in real estate, which is often seen as a safer long-term investment. However, experts note that returns on the residential housing market are typically low and may not offer significant financial gains.

Additionally, younger Americans with higher incomes are more likely to invest in cryptocurrencies instead of traditional stocks and bonds. A Bank of America survey found that younger millionaires allocated 15% of their portfolios to digital assets, compared to an average of 2% for those over 42 years old. This shift towards cryptocurrency is driven by the belief that traditional investments may not provide above-average returns.

Overall, the combination of historical market crashes, volatility, and the appeal of alternative investments has contributed to younger Americans' lower investment rates in the stock market compared to older generations.

Fear is a major factor in hesitation

When it comes to investing, fear is a significant factor in many people's hesitation. This is especially true for new investors, who may be venturing into unknown territory and are unsure of what to expect. Even experienced investors can fall prey to fear at times, as the prospect of financial loss is a very real and valid concern.

The fear of investing is often driven by a lack of knowledge about the stock market and how it works. By taking the time to learn about the market, common economic shifts, and their effects on the market, new investors can start to alleviate some of their fears. It is also important to understand the role of government influences and other external factors that can impact the market. This knowledge can empower individuals to make more informed decisions and reduce anxiety about the unknown.

Another way to combat fear is to set clear financial goals and develop a strategy to achieve them. By identifying short-term, long-term, and intermediate goals, individuals can create a roadmap for their financial journey. It is also crucial to analyze one's risk tolerance and determine how much loss they are comfortable with. This can help guide investment decisions and ensure that individuals do not take on more risk than they can handle.

Starting small is also a recommended approach for those hesitant due to fear. Beginning with small sums of money that one can afford to lose can help ease anxiety and provide a learning opportunity without significant financial risk. As individuals gain more knowledge and confidence, they can gradually increase their investments. This approach aligns with the principle of compounding interest, where even small investments can grow over time.

Fear can also stem from a lack of trust in the market or specific investments. To address this, it is beneficial to research the history of the market and understand how it has weathered various economic cycles. Recognizing that markets go through ups and downs and that downturns are often followed by recoveries can help individuals maintain a long-term perspective.

In conclusion, while fear is a natural emotion when it comes to investing, it should not paralyze individuals from taking control of their financial future. By educating oneself, setting clear goals, and starting small, it is possible to overcome fear-based hesitations and become a successful investor.

Many Americans don't know their investments

The survey also revealed that many Americans don't realize they are invested in funds. Over half of Americans with workplace retirement accounts (53%) have exchange-traded funds (ETFs), index funds, or mutual funds, while 47% believe they don't have these investments or are unsure. This may be because workplace accounts often have limited investment options, and some investors may not know what's in their accounts. For example, a target-date fund, commonly used for retirement savings, is a type of mutual fund that shifts from investing in stocks to lower-risk investments as the target retirement date approaches.

Additionally, a Stash survey found that while 90% of Americans want to build wealth, almost half don't know where to start. This is reflected in the low number of Americans with non-retirement investment accounts (31%). Many Americans also admitted to not fully understanding their retirement investments, with 45% of those investing in 401(k)s or Individual Retirement Accounts (IRAs) falling into this category.

The hesitation to invest may be due to fear and intimidation, as stated by Erin Lowry, author of "Broke Millennial Takes on Investing." The use of incorrect language when discussing investing may also contribute to the confusion, as Americans often say they are "saving for retirement" instead of "investing."

To address this knowledge gap, financial experts recommend educating oneself on the basics of investing, setting financial goals, and considering factors such as future growth potential, historical performance, and fees when choosing investments.

The importance of financial education

Financial education is a basic life skill that has a direct impact on personal well-being. It is the key to a successful financial future. Financial literacy gives an individual the tools and resources they need to be financially secure throughout their life. It empowers individuals to make smarter decisions about their finances.

Financial literacy can help individuals avoid making devastating financial mistakes. For example, it can help them understand the difference between a floating-rate loan, which may have a different interest rate each month, and a traditional individual retirement account (IRA), which can't be withdrawn from until retirement. Financial literacy can also help individuals prepare for financial emergencies. For instance, by teaching them about the importance of an emergency fund that can cover three to four months' worth of expenses.

Financial literacy can also help individuals reach their goals. By understanding how to budget and save money, individuals can create plans that define expectations, hold them accountable for their finances, and set a course for achieving important financial goals. Financial literacy gives rise to confidence. With knowledge about finances, individuals can approach major life choices with greater confidence and be more likely to achieve the outcome they desire.

Financial education should be imparted from a young age. People who understand how money works can start earning and investing early and avoid lifelong money struggles. It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

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