Whether working, single, married, or widowed, every woman should have a basic understanding about how to invest and manage her money
WOMEN face different obstacles from men when it comes to investing and tend to have less in savings because women often take time off to raise children. With years of not earning a salary, there is no money being saved and compounded upon.
In addition to this, women typically outlive men by close to 10 years on average. Research shows that most women would rather preserve their money by stashing it away in a bank account or other ‘safe investment’.
But as the ponzi scheme MMM has proven, safe is not always safe.
Why Safe Isn’t Safe: When you ask most women why they don’t invest, the typical answer is that they don’t want to lose their money. They see the investment they have drop, become worried and sell out hoping to not lose any more money. They then put the cash into a savings account where they won’t lose any money.
But they do lose money. They lose purchasing power, also known as inflation.
Historically, inflation runs around 3%. To give a basic example of inflation, if a gallon of milk costs N1,000 today and inflation is 3%, next year at this time, that same gallon of milk will cost 3% more.
The Stock Exchange
Investing in the stock market can be confusing and scary at the same time, but if you just understand the basics, you will have all of the information you need to know. There is no need to learn about binary options, calls, puts or soybean futures.
To understand these and to be successful in the market requires a ton of knowledge and time commitment. But to simply be successful in the stock market by investing in mutual funds and exchange traded funds is much easier.
Learn the patterns
Yes, the market will drop. It always does over the short-term. You will lose money but only on paper as long as you don’t sell out- but over the long-term, you will make money. Over the short-term, there is volatility in the market. Prices fluctuate and can fluctuate wildly. But over the long-term, things calm down and the general trend is positive.
For help seeing this, just pay attention the next time you are at the beach or lake. Watch the wake of a passing boat. Right after the boat passes, the waves are high and the water looks dangerous. But follow the wake out over the water and the waves become smaller and smaller and eventually disappear. This is the stock market both short and long-term. Focus on the long-term.
Your emotions, your worst enemy
Women are naturally emotional, and this comes to bear on their relationship with money as well. While it sounds easy to just focus on the long-term, the truth is that this is hard to do in reality.
Understand that the loss is only on paper. You never actually lost any money unless you sell. It’s like your house. Your house might gain or lose value. But you never know this until you actually sell your house and have the cash or check in hand. Social media is good at bringing your emotions out. They make everything seem scarier with the graphics and sounds they use, as well as with the words they use to describe the market. The media sensationalizes the market to keep you watching. When they start telling you how the stock market is crashing or melting down, you know it is time to turn the channel.
Have a plan: Before you invest, sit down and write out your plan. What are your goals? Why are you investing the way you are? All of this is important because in the future, you will be reviewing your plan to make sure you are still on course.
Your investment plan also helps when the market gets rough. You may be tempted to sell and run for safer investments. But by reviewing your plan, you can see what your goals are and why you are investing the way you are. It will help to keep things in perspective and keep you invested over the long-term.
Invest, Don’t Trade
There is a difference between investing and trading. Trading is when you are constantly buying and selling funds, trying to avoid losses and earn a higher return. Unfortunately, this rarely works. In fact, the average investor only earns 2% while the market earns 8%!
This is because the average investor keeps jumping from investment to investment. Success in the stock market doesn’t work like this. You need to be invested for the long-term.
No one can time the market and invest only when the market is rising and be out of the market when it is falling. It fluctuates every single day. Instead, just invest. Create your plan, pick a few investments, and continuously add money to these investments on a regular basis. Ignore everyone telling you the market is high or low and just invest. Remember, your eye is on the long-term.
There are two types of investments: active investments and passive investments. Actively managed investments (mutual funds in this case) are run by a portfolio money manager who is trying to beat the market.
On the other hand, a passive investment is a mutual fund that is simply going to match the return of the market. So which philosophy should you follow? You should choose passive investments.
The fact is that no one beats the market on a consistent basis, year in and year out. Only one person has done it recently, and his name is Bill Miller of Legg Mason. The mutual fund he ran beat the market every year from 1991-2005. He hasn’t fared very well since. While his run was great, the odds of completing this feat are 1 in 2.3 million.
Don’t bother trying to beat the market, because in the long run, you can’t. Just take what the market gives you and you will be fine.
Know that you have to pay a management fee with mutual funds and exchange traded funds. Paying a higher management fee does not guarantee a better return. In fact, there is no correlation so you are better off paying the lowest fee possible.
Luckily, this is where passive investments come into play again. Since a passive fund doesn’t employ a management team to pick investments, the fees are much lower.
While it doesn’t seem like much, when your investments start approaching six figures the fees really add up. You work hard for your money.