“Be Careful,” They Said. “Invest in Bonds,” They Said.

“We aren’t taking initiative because we are counting on fear as a reason to keep from doing things.”

– Caroline Paul, author of “The Gutsy Girl: Escapades for Your Life of Epic Adventure.”

While Caroline wasn’t necessarily talking about women and investing when she stated this, I think it applies.

A few months back I stumbled upon TED Radio Hour’s podcast “Turning Kids into Grown-Ups.” I’m a huge fan of TED, although this wasn’t a title I would typically gravitate toward, I gave it a shot anyway.

Caroline Paul was featured, and she shared several highlights of her time as the 15th female firefighter in a group of 1,500 male firefighters. Her segment of the podcast focuses primarily on the ways we treat our girl children differently than our boy children especially when we are outside, where risk factors are higher.

Parents are more likely to say things like “be careful” when talking to their girl children. Whereas there is more encouragement for boys to get involved with sports, to “be brave”, and take more risks, as Caroline points out. Unfortunately, these words can follow us into adulthood and possibly even formulate the little voice in our heads when we are contemplating investing.

Picture1 "Be Careful," They Said. "Invest in Bonds," They Said.

I wanted to see the facts for myself, so I turned to Riskalyze, which is a software that we introduced two years ago into our process at the office to better gauge what our clients’ feelings are toward investment risk. Here are some of my findings:

  • Of clients that are women decision makers, 30% were considered conservative with a risk score less than or equal to 40, on a scale of 1-99.
  • Of clients that are women decision makers, 11% were considered aggressive with a risk score greater than or equal to 80, on a scale of 1-99.
  • Average age of the conservative woman decision maker: 61.5 years old
  • Average age of the aggressive woman decision maker: 50.67 years old

My first thought was that there aren’t many female clients who align with an aggressive risk score. I included age because there is a rule of thumb that we hear all too frequently; that as you get older, you should take less risk. The metric includes taking 120, minus your age, and that the resulting number should represent the allocation that should be in stocks, with the remainder of the balance in bonds.

If this theory holds true, then someone who is 60 years old “should have a portfolio of 60/40 stocks to bonds.” There is a huge issue with this train of thought. If someone finally starts saving for retirement at age 50, they have some serious catching up to do and might need to take on more risk throughout their 50’s and 60’s (not less)!

According to U.S. News & World Report, of women who have a defined contribution plan (think, 401(k) plans), 42% are invested in a single target-date fund. Most of the time, the decision to invest in a target date fund is made right at enrollment and is never again reevaluated.

What these target-date funds do is diversify your retirement savings into several asset classes, with the majority being U.S. and international stock funds in the beginning. As time passes and we approach the “target retirement date” of 20XX, the fund becomes more conservative and introduces a higher bond allocation. Target Date 2045 funds have about 10-15% of its allocation in bonds. Target Date 2020 funds has 45% in bonds, nearly half!

By taking less risk and not having all chips on the table when the stock market is showing signs of weakness, this can lead to better results than someone who went all in. But what happens when the stock market is down 0.5% since the beginning of the year and bonds are down nearly -5.0%?!

Below, I’ve provided you with a snapshot of the Bond Market Index since January 1st of this year. Odds are you aren’t keeping tabs on what bonds are doing right now because the stock market is all we hear about in the news, and it’s what some investors benchmark their portfolio to.  Check it out:

chart "Be Careful," They Said. "Invest in Bonds," They Said.

In closing, the moral of the story today is to take a look at your portfolio’s current investment allocation and remember what Babe Ruth once said: “Never let the fear of striking out keep you from playing the game.”




Categories: Educational Articles, Market Commentary

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