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In a world that's constantly evolving, women are rewriting the rules and shattering stereotypes in every aspect of life. Yet, when it comes to the realm of finance and investment, there still exists a noticeable gender gap. The apprehensions surrounding investing have, unfortunately, deterred many women from taking control of their financial destinies.
In Fidelity’s recent Women and Money Study, it was found that 32% of women cited fear of risk as a barrier to and as a result, be more hesitant to begin investing or to keep contributing.
Investing is not an exclusive club reserved for the financially savvy or the risk-takers; it's a powerful tool that can help women secure their financial future and achieve their goals. Once you’ve empowered yourself to earn more so that you can save more towards your retirement and other goals, it’s time to learn some basics about investing those savings.
Presenting: Compound Interest and Diversification.
Why You Should Harness the Power of Compound Interest
In my experience, most investors focus on getting higher returns. But what’s even more important is to take advantage of compound interest through regular investing. It’s a basic model for growth potential. Why?
The more you invest and the longer period over which you do it, the greater the opportunity to create long-term value. The sum of your money can snowball into more money because it’s earning interest on itself.
Here’s a hypothetical example to illustrate the concept:
Let’s say you’re 40 years old earning a $100,000 annual salary with just $50,000 saved for retirement. What happens if you start investing 12% of your annual salary, which is $1,000 a month, to your 401(k) plan or other tax-deferred retirement savings account?
If you did that for 27 years to retire at Social Security’s full retirement age of 67, earning a modest 6% average return, you could end up with a $1,005,586 portfolio at retirement. That’s right—you could be a millionaire!
Here are those results in a chart using the U.S. Securities and Exchange Commission’s (SEC) compound interest calculator. * The middle line shows an overall average 6% return, with 2% return variables of 4% and 8%.
Of course, as you’re earning more you can save more, leading to more money that can compound over time.
*Per the SEC, you should understand that slight adjustments in any of those variables can affect the outcome. Resetting the calculator to provide different figures will show you different scenarios.
Create a Lasting Investing Habit
Can you see why compound interest is such a powerful driver for investment growth potential?
If so, push any concerns you have about investing out the window and start by making regular contributions to your employer's retirement plan from your paycheck or by scheduling automatic transfers from your checking to an investment account. The more automatic you make it, the more likely it’ll become a habit.
You’ll get so used to the money coming out that you’ll stop noticing it’s “gone.” And as you incrementally increase how much you’re saving, you’ll naturally learn to prioritize your spending and cut out the things that aren’t important to you.
And if you’re mid-career and feel like it’s too late to start investing, consider this:
Your salary is probably much higher than what in your twenties.
Which means you likely have more money than you can commit to saving.
And you still have 15+ years of runway to invest it properly and gain from long-term compounding.
Choose Boring, Diversified Investments
Smart investing isn’t hard and doesn’t require an expert stockbroker who’s clued into the hot stock tip of the day or a hedge fund manager with a complicated, private opportunity to build wealth. Instead, invest wisely for the long-term with a well-diversified (and boring) portfolio. The experience should be like the tortoise during its race to win—slow and steady.
How Diversification Works
Diversification strategically distributes risk by allocating investments across various asset classes such as stocks, bonds, real estate, commodities, and more. It extends beyond asset types to encompass sectors like technology, healthcare, energy, and specific industries within those sectors, like software and hardware in technology. By avoiding the pitfall of concentrating all assets in one area, this approach ensures that a well-diversified portfolio may experience less impact from a single disappointing return, as other components remain stable or show growth.
Diversification serves as a protective measure, minimizing the likelihood of a singular investment's underperformance significantly affecting your entire portfolio. By balancing losses with gains in other portfolio segments, it acts as a cushion against adverse impacts. Individuals, particularly corporate employees involved in stock options or employer stock purchase plans, may unintentionally accumulate a concentrated position in company stock, often overlooking the importance of diversification in maintaining a well-rounded and resilient investment portfolio.
Here’s how this looks. The asset class chart (or “quilt”) below was created by Ben Carlson, CFA and portfolio manager for Ritholtz Wealth Management LLC to show how different asset classes performed over a 10-year period.
Showing returns for the years 2013-2022, each color represents an asset class with the highest annual return at the top. You can see there’s a lot of fluctuation (or color) over time between the winners and losers.
Diversification May Reduce Volatility*
A well-diversified portfolio can also reduce volatility, which is the degree to which prices fluctuate up and down for stocks, bonds, commodities, or indexes.
Reduced volatility can increase the amount of money available to compound over time, resulting in more consistent growth. And over the years and decades, consistent growth can lead to more substantial wealth accumulation.
Diversified investments may not provide much of a thrill, but they may offer a more measured and sustainable path to financial growth and wealth.
*Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your situation.
Investing is not a realm reserved for the privileged few; it's a pathway to independence, security, and the fulfillment of dreams. By overcoming the fear and misconceptions that may have held you back, you are creating a secure financial future.
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Here's to a future where every woman not only earns but owns her wealth, rewriting the script of empowerment and prosperity!