Sallie Krawcheck (CEO of Ellevest and one of the few people in the world I go “fan-girl” over) is pushing back hard on the idea that women don’t know what to do with investing compared to men. Her recent remarks got me thinking about how common it is for people to see risk as a bad, scary thing when it really is often an opportunity and one we should all think about occasionally.

In the financial services world, we often talk about all the different “risks” an investment might have – “Market” risk (more commonly felt as volatility), “Inflation” risk (also known as purchasing power), and “Concentration” risk (too many eggs in one basket) being the core ideas. There are, however, more fundamental risk concepts that we should consider, not just when we are saving for our future but in life in general.

The first is how “Risk-Aware” we are. Women are often labeled as “Risk-Adverse” and yet more women than men are opening their own business every day and I can tell you firsthand that there are few things in life with more ongoing risk than running your own business. Since 2007, the number of women-owned businesses has grown by 58% versus overall business growth of 12% so as a female small business owner, I’m in good company. Women-owned businesses represent 42% of all businesses, employ over 9 million people and generate nearly $2 trillion in revenues so many, many of us know all about risks, at least from a business standpoint.

When it comes to investments though, many women sit on the investment sidelines not because they are “Risk Adverse” but because they are “Risk Aware.” They know that there are risks involved and need additional information (knowledge) to make well-educated decisions. Of course, the other side of that is that women in general are busy, busy, busy, and finding the time to ask those pertinent questions often falls to the bottom of the To Do list since women are more than twice as likely as men to put family needs (both immediate and extended family needs) before their own.

Once we become educated and are comfortable with the “Risk Aware” factor, women outperform men by about 40 basis points and we all know how even a little extra compounded year over year can make a big difference in the long run. Fidelity analyzed 5.2 million (so, quite a few) accounts from January 2011 to December 2020 (which includes the initial “OMG, WHAT is happening to the world” market swoon of March 2020) and found that accounts held by women outperformed their male counterparts over that period. Why? A couple of reasons but mainly because women trade less in their accounts so, while men are chasing returns and trying to time the market (whether they realize/acknowledge that that’s what they are doing or not), women are depositing dollars and moving on to the next thing on their To Do lists.

The other risk is one that, as financial consultants, we look at all the time but investors often don’t even realize is part of the conversation – “Risk Capacity.” There probably isn’t an investment website out there that doesn’t have some reference to “Risk Tolerance” but that’s really only part of the story. Your “Risk Tolerance” is how comfortable you are taking a defined level of risk in your portfolio. Put another way, whether you have a cast iron stomach to handle the ups and downs of the markets or even a little fluctuation causes your heart palpitations is your “Risk Tolerance.” What you NEED your portfolio to do to reach your goals is your “Risk Capacity” and is one of the reasons we continue to nag you about updating your financial plan over the years.

Let’s say you have a low tolerance for market risk. When we run your financial plan, we’ll take that into consideration and you’ll see it reflected in the resulting picture we review. Now, if the picture has some red over there on the right, meaning you’ve run out of assets later in life, you can see that your low risk tolerance may have adversely impacted your long-term success so your “Risk Capacity” might need to go up a notch or two and we’re going to have to do some education to bring your “Risk Tolerance” up as well. On the other hand, let’s say that the green bars sail right on past your old age, leaving you with an excess of dollars in your declining years (decrepitude came up in my thesaurus but that seemed a little extreme….). In this case, you can bring down your “Risk Capacity” because your investments don’t need to work as hard to meet your goals.

Women now control 32% of the world’s wealth, totaling a staggering $72 trillion. This figure is expected to grow at a rate of 7% annually, outpacing the overall growth of global wealth. As more of us stand to inherit wealth (often by outliving our significant others) and make critical financial decisions, it’s crucial to understand how you approach investing and address the gender misconceptions that persist.

As you think about your financial situation, consider not just what you have in your portfolio but what do those investments need to do and come up with a solid balance between all of your “Risk” factors. If you’re not sure, it’s probably time to talk.