The Australian Securities and Investment Commission (ASIC) has found only 20% of women understand what ‘risk return trade-off’ means and 35% understand the term ‘diversification’.
ASIC’s recently released Australian Financial Attitudes and Behaviour Tracker also found that in comparison around 40% of men say they understand ‘risk return trade-off’ and nearly 50% claim to be au fait with ‘diversification’.
To add salt to the wound, men were also much more likely to have held investments outside of superannuation and/or their home than women.
This is a problem with far-reaching implications for Australian women. If women don’t take a more active interest in investing, including understanding the general principles of investing, many could end up going backwards.
Author of The Accidental Creative Todd Henry says: “A lifetime of mediocrity is a high price to pay for safety. You need to push through those places where it is easier to gravitate towards comfort.”
Fear of the unknown may be partly to blame – but as Henry suggests, it’s up to the individual to extend themselves and reach higher.
So the first step for some women needs to be spending time learning about managing money. For example, you might take a course, read some books or see a financial adviser to gather knowledge and, more importantly, an understanding about investing.
Over many decades women have become great at earning money – in fact, an AMP.NATSEM report Modern Family found many women are now the family breadwinner. But we’re clearly not so good at looking after our loot. As a woman and a financial adviser I feel very strongly about empowering women to succeed.
If you think you don’t have time to learn about investing then think about this: if you leave your money sitting in the bank at the moment, with interest rates lower than the rate of inflation, over time you could wind up losing money.
Here is a cheat’s guide to learning the lingo you need to know and a few tips on how to get started:
Risk return trade off
You invest money to see it grow – that is, to get a return. But returns are intimately connected to investment risk. In general, higher risk investments carry greater potential return – or loss.
My top tip: Read about the various classes of investment and what the general expert consensus is on the risk category each falls into. Also read Women’s Agenda next month for my column on this.
Diversification
This just means you have your money spread across multiple investments rather than just one to reduce your risk of losing everything if your investment doesn’t do so well.
My top tip: Take stock of what investments you currently have and if it’s fewer than two, seek advice on how you can diversify.
Dollar-cost-averaging
Dollar-cost-averaging means that you invest small amounts of money on a regular basis over a period of time as the investment market rises and falls, rather than investing a single lump sum at one price point in the investment market. This strategy can make a big difference in the long run.
My top tip: Check out how this principle works in action using AMP’s online dollar-cost-averaging calculator.
Performance
When people talk about the ‘performance’ of, say, a managed fund, they are simply giving an indication of the historical returns – that is, how well the fund has performed over the past several years. This information is often used to make predictions about the future but beware: predictions must always be viewed with caution because past performance is no guarantee of future returns.
My top tip: It’s important to ensure that financial apples are not being compared with financial oranges; try comparing some managed funds, but first check that they are similar in nature. Better yet, seek professional advice on what would be best for you based on your personal circumstances.
Liquidity
Liquidity just means how quickly you can sell an investment to get your hands on cash. For example, to sell an investment property might take some time – but selling shares can be instant – they are extremely liquid.
My top tip: Make sure that you are not putting all your eggs into an investment basket that offers low liquidity (such as property) if you think you might need quick and easy access to funds down the track.
So there you have it, a few terms to help you get started – but remember there is much more to learn beyond this.
It’s important to learn some of the lingo but don’t think you need to become an expert to invest. What you would be wise to do is to seek advice to make sure that what you choose to invest in aligns with your personal goals, timeframe and ability to cope with risk.
Ultimately, the more you understand about investing, the more comfortable you may become with taking well-calculated risks – and that will hopefully serve you in the long run.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.