Women in the U.K. Have a Lot to Gain From Riskier Portfolios

(Bloomberg Opinion) -- Research shows that in the U.K., women tend to be better investors than men. And yet they aren’t as rich. A 2018 study by market research firm Kantar TNS estimated that although women owned 14.3 billion pounds ($18.7 billion) in investments, men held more than twice as much, with some 29.3 billion pounds.

There are many reasons for this. But one of the less appreciated issues is that women in the U.K. have historically preferred less risky investments, such as savings accounts, which generate smaller returns. This wasn’t the most significant disadvantage when nominal interest rates were relatively high. However, in our age of near-zero interest rates and quantitative easing programs, the returns on such savings products now considerably lag other assets such as stocks and bonds. That performance gap could become even greater with the Bank of England actively considering negative rates.

Low interest rates are bad news for savers of any gender. Consider this: When rates were nearer to 6%, it was possible to earn an income of 10,000 pounds a year with a lump sum of 172,500 pounds in the bank. To earn the same today would require a savings pot worth more than 1 million pounds. 

Data from the U.K. tax authority, HM Revenue and Customs, show that women are more likely to opt for low-yielding savings products, such as cash individual savings accounts, than men. With the Bank of England base rate currently at just 0.1% and RPI inflation at 0.5%, such products virtually guarantee that money loses value in real terms.

The same HMRC data show that men are 25% more likely than women to invest in stocks and shares ISAs. These can, of course, drop in value, but their higher returns offer a greater opportunity to build wealth. The tax advantages of ISAs, meanwhile, are largely wasted on cash ISA savings. Savings accounts don’t produce a capital gain, and the income involved for most savers rarely creates a tax liability with interest rates this low.

So what should women in the U.K. do to build wealth in today’s low-rate environment? The first thing is to have a clear focus on what it is that you are attempting to achieve. Why are you saving and what is your investment horizon?

If you’re trying to grow your emergency fund or put money away for purchases you plan to make in the next five years, cash ISAs do make more sense than riskier investments. They can also bring comfort when facing threats of redundancy or periods of great uncertainty.

If you are investing to build wealth or to plan for retirement, however, your longer-term horizon will justify at least some riskier exposure. Even if the stock market does fall sharply at some point, there is a reasonable historical expectation that those losses will be more than recouped over a 10- to 20-year outlook. Major adverse events have almost invariably been followed by strong market recoveries. Such happened after the British European Union referendum in 2016 and even the onset of the Covid-19 pandemic.

Typically, the most comfortable means of taking stock market risk is via regular saving into diversified funds. Not only is the increase in risk incremental, but you also benefit from that favorite investment phenomenon: pound cost averaging. A regular investment of 100 pounds per month, for example, buys 10 units in a fund when each unit is priced at 10 pounds. If the market unexpectedly halves, that same monthly contribution will buy 20 units. Equally, if the fund were to have doubled instead of halved, after a strong surge in market prices, you would only get 5 units for your monthly contribution.

In this manner, you tend to buy more units when prices are cheap and fewer when the price is more expensive. You effectively end up with a bigger investment having paid less for it. And regular investing helps to calm the nerves of even the most cautious investors.

British investment manager Helena Morrissey once described women’s preference for low-yielding savings products as “recklessly cautious.” Being careful in times of uncertainty is always wise, but it’s also important to ensure you don’t get punished for it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.

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