Women, Financial Power and Barriers to Investing

The good news first. Behavioural finance has found women perform well when they do invest. Research work carried out by Terrance Odean, Professor of Finance at UC Berkeley’s Haas School of Business shows that women tend to trade less actively than men which incurs lower trading costs; they behave more like ‘buy and hold’ investors sticking to their long term goals. The study stated that ‘virtually all of the gender-based difference in performance can be traced to the fact that men tend to trade more aggressively than women.’ Another earlier study talks about the human quality of overconfidence and notes the gender differences. “ Psychological research has established that men are more prone to overconfidence than women, particularly so in male-dominated realms such as Finance. Rational investors trade only if the expected gains exceed transactions costs. Overconfident investors overestimate the precision of their information and thereby the expected gains of trading.”

So, why are women still lagging behind in investing then?

A recent Fidelity UK based study states ‘the majority of women don’t invest in the stock market’,’ ‘women favour the perceived caution of cash.’ Women face penalties that affect their career progression and earning potential titled in the study as ‘The Motherhood Penalty’, ‘The Childcare Penalty’ and ‘The Good Daughter Penalty’ - namely, opting out of careers to have children, paying for childcare and caring for elderly relatives. The word 'penalties' is cringe worthy to hear as it implies being punished for contributing to caring for life itself. And yet the reality is that our economic system does not recognize women (or men) or for making choices for ‘unpaid’ yet hard work.

A lack of understanding about what investments can offer is also a significant barrier. What was disturbing (although not shocking in my experience as a financial adviser) to read was that more than half of the women invested had no idea where their pension fund was invested and over a third didn’t know how much their pensions were worth.

So, opting out of the workforce for legitimate reasons, then having gaps in earnings and living longer result in a real problem - a pension gap. Women are also short-changed by the gender pay gap which contributes to lower pension and investment contributions. Women have a smaller pension pot size than men at all ages, tend to have more money in cash ISAs and less money in Stocks & Share ISAs overall. This worries me and at the same time, also galvanizes me into wanting to educate more and more women about how we can empower ourselves financially.

One of the actions suggested by the study is to increase pension contributions by 1%. To me, this seems too little. I would suggest really working out for yourself based on when you wish to achieve financial independence and what is sustainable as an annual income for you, what would be most appropriate. Make sure you reassess this regularly, at least once or twice a year. The 4% rule is an easy way to work out what you need for retirement.

Another action I recommend is empowering yourself with financial literacy skills. Read your pension valuation statements, Google any terms you don’t understand, fill your feedly with interesting personal finance reading material, call the pension providers help-desk and ask them to explain or help you with reading material to help you understand what you are reading- be persistent with this. And google Trustnet and the names of the funds you are invested in and train your eyes to visually read the information- information is so easily available and you can train yourself to read this if you are willing to persist through some initial discomfort if you feel incompetent. You could also speak to someone you know who is financially more literate than you and willing to help or mentor you. I encourage you to advocate for your own needs - for financial literacy and healthy financial choices. There are so many resources available, you don’t always need a financial adviser necessarily to understand what you are invested in and what the overall value of your pension pot is. And by the way, even highly intelligent, competent finance professionals that I have worked with as clients tend not to look at their pension statements or necessarily take the time to understand them. So, I really want to reassure you that if you have a clear intention and follow through with an action, you can easily overcome this hurdle.

A study from the other side of the pond titled ‘Women & Financial Wellness: Beyond the Bottom Line’ by Merrill Lynch illustrates the issue of the ‘gender wealth gap’ which is the difference between men’s and women’s accumulated assets.

Some of the actions suggested in this study which I liked are:

Break the taboo around money talk-Have you heard of Conversation Cafes? Nothing stops you from hosting one with about 6-8 people; here are some guidelines to follow to help you get going. Apparently 61% of women would rather talk about death than money. I offer you a gentle challenge to break this social conditioning we have and move towards feeling comfortable and confident speaking about money.

Start early- compounding & longevity can work in your favour. If you spend time out of the workforce, remember to catch up with contributions into your pension once you start working again or brainstorm strategies on how you could take care of your children and also take care of your future self financially.

I hope you will take some action to support women investing more, regardless of your gender. As for me, I intend to host a few Conversation Cafes around the topic of money both online and in London; if you want to support this work and get involved, please drop me a line.

Happy Financial Future and if you want to attend one of my webinars about feeling more confident about investing and retirement planning, sign up to my Newsletter. I intend to follow through on doing more to help educate women (and include men) on investing.

My Favourite Books I read in 2017

My intention for 2018 is to read every day, meditate every day, cut back on social media time and be more like Cal Newport who inspires me with his writings on 'deep work'. January is a digital detox month and my brain already feels so much clearer. I cheated a little bit though and have sent the odd tweet. For the most part, though, I have been 'good' and spent more time offline with friends and on the phone. I digress. Back to my favourite books listed below. Oh, I only read non-fiction - so there’s no lists for fiction if that is your thing.

Non-Fiction

Your Money or Your Life by Joe Dominguez,‎ Vicki Robin, Monique Tilford and Mark Zaifman

A very sneaky book...in the sense, that it is non-prescriptive and yet, it gets you to follow some basic steps such as methodologically tracking all your income & expenses, which ultimately leads you to reflect, introspect, get clear and make different decisions with both earning, spending and using money. You start seeing money as an exchange of life energy and have a logical way of seeing this- see my post - Frugal is Freedom for more on it. Also, if you are interested in FIRE (Financial Independence, Retire Early), this is a good book to read.

Misbehaving: The Making of Behavioural Economics by Richard Thaler

If you had any illusions about how rational we humans are with money, this book sets you straight. Interesting research, great anecdotes and useful to learn the psychology behind money decisions.

Finance for Normal People: How Investors and Markets Behave by Meir Statman

Having heard Meir Statman speak on podcasts, I grabbed this book as I found his insights worthwhile. He talks about the emotional, expressive and utilitarian uses for money. We compartmentalize money into buckets, have incredibly foolish behaviour with it, take mental shortcuts, are overconfident investors and so much more. Meir helps investors reflect on what they really want from their investments focussing on what is the money for  - retirement, children's education, socially responsible investing and so on. He also advocates automating investments. Overall, a worthwhile read and useful especially if you invest and want to understand yourself as an investor better.

Non-Investment related

The Nonviolent Life by John Dear

What is a nonviolent life and how can we be nonviolent to ourselves, others and join a global movement to impact the world? John Dear, a Nobel Peace Prize nominee attempts to answer this question and does so beautifully. Bear in mind, he is a Christian and so teachings of Jesus (whose message of nonviolence was radical for his time- love your enemy, what?) are sprinkled liberally through the book which I actually enjoyed. I bought the book for myself and gifted it to a few friends.

Sapiens: A Brief History of Humankind by Yuval Harari

First of all, Yuval Harri practices Vipassana, also known as Insight Meditation and does 60-day silent retreats; he plans his working year around that and schedules it first. For this, I already hugely admire him. Secondly, I find history very dull and could never get into it in college or school. However, this book - I could not put down. I also like that he weaves relevant connection to our present day issues whether it be talking about colonialism, racism or money stories; worth buying and savouring every page. There is no thirdly.

The New Jim Crow by Michelle Alexander

I heard about this book via Miki Kashtan, an international Nonviolent Communication teacher whom I deeply admire and trust. The book made me quite angry & disgusted. No, the book didn't do that, I chose to. I felt quite angry on reading the book and yet, I was glad to have read it - we need to be better educated about crime and 'justice'.  The book shines a light on racial segregation, colour blindness, how the prison system in America almost substitutes slavery. It is very thought-provoking and well worth the emotional aggravation you may feel on reading it.

A Guide to the Good Life: The Ancient Art of Stoic Joy by William Irvine

A great manual for life, if you are interested in Stoicism, then even better. It talks about reducing worry and focusing only on things we can actually control (not very much). I love the challenge of letting go of the 'illusion' of control we have and learning a philosophy that helps you have a truly joyful life. I became interested in Stoicism through the work of Tim Ferris and so glad I bought this book, highly recommend.

Evicted: Poverty and Profit in the American City by Matthew Desmond

Winner of the 2017 Pulitzer prize for non-fiction, it is an incredible read. Matthew Desmond is an ethnographer, he lives in communities in the United States that struggle with housing and tells an honest, heart-breaking account of incredible characters who struggle to keep a roof over their head. The struggle with homelessness is so real, the landlords have a lot of power with eviction and it seems the system almost obstructs survival for tenants who fall behind. Residential stability is important for psychological stability and community stability. Families lose so much with eviction. I read recently that this book also made it to Barack Obama's recommended book list for 2017.

Further reading:

My favourite books on Money and Personal Finance

Book Review: The Joy of Tax

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“Tax is actually the Government's money that we sometimes hold on its behalf” – Richard Murphy

Tax is not the most riveting topic to read about. The author's work with the Tax Justice Network got my interest and I bought the book. Richard Murphy, a Chartered Accountant in the UK is passionate about this topic and the book intelligently challenges some commonly held views about tax.

Some of my favourite lines from the book are below with my thoughts:

“For most people, tax means income tax. Income tax represents only just over a quarter of all taxes paid in the UK.”

Where does the rest come from, you may ask? Income tax is the highest contribution followed by National insurance contributions, Value added tax & Corporation tax (based on the 13/14 tax year). Besides this, there are over twenty-seven categories of tax including Swiss capital tax and Climate change levy.

On money creation:

  • “The reality that is now accepted to be true by the Bank of England is that all money is created by banks making loans.”

  • “Money is created by a stroke of a pen or some taps on a computer keyboard. There aren’t any physical processes involved.”

Money is created ‘out of thin air’ as Richard refers to it. The whole section on money creation was quite fascinating. I also learned about the chicken-egg scenario - governments don’t necessarily raise taxes to spend, they spend first and then reclaim the money already spent.

On Education

  • “Indeed, tax is at the heart of our society. But we do not talk about it, and we do not teach it, and that is little short of a national scandal.”

I agree that our general financial literacy is poor on practical money matters or personal finance. Many of us, citizens, see tax as something to avoid instead of it being a joyful contribution. I imagine Richard would love to see this change and have an effective tax curriculums taught in schools and universities. Politicians too could benefit from a better understanding of the subject.

On the absurdity of some taxes

  • “Not only does the UK have a wide range of its own tax havens available so that banks can hide their profits off-shore, it also does not charge VAT on financial services and so relatively underprices banking activity as if it were an essential service like healthcare or education and it makes no sense at all.”

  • “ We tax least the most carbon-emitting form of transport, which is air travel.”

  • “If only we taxed excessive consumption we would, without doubt, create funds for future generations who will have to manage the legacy of our mistakes, including nuclear waste.”

  • “Interest relief on mortgage borrowings has been provided to landlords for the last twenty-five years when it has been denied to owner-occupiers.”

I wholeheartedly agree on the absurdity of it.  It is tragic to witness younger generations or our lower-income citizens now effectively priced out of buying a decent home - at least in London. Richard’s proposal of a more joyful tax system would eliminate ISA tax relief and phase out pensions tax relief - both of which he argues create wealth inequality and favour those with higher income. Pensions tax relief, he explains, was originally offered as by contributing to one's own pension, you were lessening the burden on the state; also, it is not tax avoidance. As a financial adviser, I am torn -  a big part of my role is helping people invest for the future, tax efficiency can be a pleasant incentive to encourage money being invested for the future; yet, I can see the clear logic of his proposal.

I particularly enjoyed reading the section about tax secrecy, creating structures to avoid paying tax, offshore companies, especially as Amazon, Google, Walmart, have been in the news for this. More recently, the Queen.

Like Richard, I am hopeful of us having a fair tax system based on principles of honesty & equality, enabling all of us to thrive, reducing wealth inequality and closing loopholes for tax evasion. The Joy of Tax is deliberately titled so; on reading it, I can see why. It was a heavy read, an important book with a crucial message -creating a common future that benefits all citizens.  I enjoyed learning from someone who understands the current tax system and cares so deeply about change for a fairer society. Richard Murphy's book can be found here and he tweets @RichardJMurphy.