Mary Farrell has been working on Wall Street for the past 28 years. As one of UBS PaineWebber Inc.'s top investment strategists, she has watched hundreds of women become astute investors. That trend began in the late 1970s, when the baby boom generation came of age, and it gained momentum in the 1990s with the spread of the 401(k). Last year, some 35% of all first-time buyers of financial products were women, according to Oppenheimer Funds. What's more, women spent 1.5 times as much as men did on such products.
Even so, Farrell says the average woman still sees a smaller rate of return than the average man. That can pose a serious problem, since women tend to live longer and spend more time out of the workforce, on average. In her book Beyond the Basics: How to Invest Your Money Now that You Know a Thing or Two, Farrell gives down-to-earth advice that any woman or family can use to grab higher returns in today's market. In late June, BusinessWeek Online reporters Nicole St. Pierre and Margaret Popper asked Farrell what women should know about investing. Here are edited excerpts of those conversations:
Q: Do women have specific investing issues that men don't?
A: I think they have specific issues because they have special needs. They should invest similarly to men, buy the same good stocks that men do, but their financial planning requires very different input.
Statistically, women enter retirement in far inferior financial shape. Many women are in and out of the labor force. They have responsibilities for children or parents. They tend to predominate in part-time or consulting jobs. So they don't tend to build the same level of benefits -- the same pension benefits, for example -- that men do. They start out disadvantaged.
The second problem women have -- and this is a good problem -- is they have longer life expectancies. They are going to need to support themselves for a longer time in retirement.
And the third thing, which is really unfortunate, is that women tend to put too much of their money into savings accounts, for example. In their desire to avoid risk, they tend to be too conservative. Those low returns from savings accounts or CDs, by the time you take out taxes and even a low inflation rate, really are unacceptable.
Among women investors we found that baby boomers tend to be much more aggressive investors and much heavier users of mutual funds. That's a healthy development.
Q: Why do you think it has take women as a group so long to become active investors?
A: I think it really took the baby boom generation to get women involved on Wall Street. They were the first generation of women with high labor-participation rates. Prior to that, many women were brought up not having career aspirations, not expecting to earn money, let alone mange it. When women started earning more, they began to have more of a say in their financial decisions. Plus, there was a sharp increase in divorce rates in the 1970s. That was a wake-up call to many women who were never savvy about their own finances.
Q: What is the most common mistake you see women investors make?
A: Not to invest early enough. It is a major issue for women. Even though more of them are in the labor force armed with professional degrees, the vast majority of them don't work full-time throughout their adult lives.
If you look at the typical man, he tends to work full-time from the time he finishes his education until retirement. As a group, men tend to build benefits, such as a pension plan, stock options, Social Security, and a 401(k). By contrast, women are usually in and out of the workforce because of family responsibilities. It's very important that women start early and contribute as heavily as possible to savings when they are working. As a gender, they have to make their assets work harder.
Q: What investment strategies should women adopt to ensure they have enough money socked away for retirement?
A: Women tend to be too conservative with retirement money. They try to make investing risk-free and keep the nest egg as safe as possible. Instead of investing heavily in stocks, women tend to put too much money in savings accounts and CDs. Particularly now, when interest rates are low, savings accounts and CDs are fully taxed, and they don't keep you far enough ahead of inflation. I'm not suggesting that women put their retirement savings into risky investments. But if they have a long-term time horizon -- if they're in their 20s, 30s, 40s, or 50s -- common stocks should predominate in the retirement portfolio.
Q: How much money do you need to retire?
A: I've seen estimates that you need as high as 80% of your former income. I think the whole issue for women is to start planning sooner rather than later. [You should] know that if you retire at age 65, you're going to have X amount in a pension or 401(k) plan, and then you can start figuring on what you can afford to do in retirement vs. what you'd like to do.
I'm not exaggerating when I say that you should start planning the day you start working. The power of compounding is so profound, that the earlier you start, the better.
This is a horror story from one of my dearest friends. She went to graduate school, got her PhD, and started working as a college professor. She had a lot of loans from school. She went to fill out her [benefits forms], and was asked: "Do you want to participate in our pension plan, which is CREF, the College Retirement Equity Funds? It's voluntary." She said no, figuring, I'm young. Why do I need to think about this? Then all of a sudden she was 45 and realized that she had no retirement plan.
She had been working there for 20 years, during the biggest bull market in history, and all she would've had to do was check off the box and a certain percent of her salary. People don't think in their 20s. And unfortunately, that's the time when it's most beneficial to think.
Q: Are there any special things women should be doing with their 401(k)
A: They should take advantage of the rules that allow them to contribute to IRAs, even while they aren't working. Most women don't -- it's not a priority. They're home, they're taking care of kids. They aren't thinking of their own financial future, but they need to.
Statistically, between 80% and 90% of women will be alone at some point in their lives, either because they remain single, they get divorced, or they're widowed. They have a longer life expectancy. So they really need to take a very active role, not just in understanding what their husband or spouse has, but also to build some financial security on their own.
Q: What do women need to know about their spouse's financial situation?
A: You need to know as much as possible. I'd say everything, and if you're not in a relationship where everything is forthcoming, that's unfortunate.
We did a financial planning seminar for women at PaineWebber, and we had an estate planner there, and the horror stories were almost unbelievable. In fact, this example came out of a human resources meeting here this week. A man had been divorced and never changed his employment records here, and his beneficiary was still his ex-wife. He had another family and wasn't remarried. The ex-wife got the money.
The estate lawyer [also] mentioned a case where a man died leaving a wife and a few children, but didn't have a will. So the estate appointed a guardian of his money for the children. [The widow] had to get approval every time she wanted to spend money on clothes from the custodian of the money. What you realize is that you really need to understand exactly what your husband's insurance is.
We have a woman broker who started a couples policy, and it has spread among a lot of our brokers. Most of her clients were male. She insisted that the spouse come in at least once a year so as to become familiar with the accounts, so there wouldn't be any [financial surprises in case of an] unexpected death.
Q: According to the U.S. Census Bureau, there are more unwed single mothers than anytime in our nation's history. That means many single women have to simultaneously raise children while saving for college and retirement. What advice do you give to single mothers?
A: That's an extremely difficult situation because there is a whole category of people who have no savings. If you're trying to make ends meet and educate your kids, it's hard. I strongly urge women and men who stay at home with children to have an IRA and to make sure that money is contributed in their name every year.
Q: How can a woman protect herself financially when going through a divorce?
A: There are many common mistakes. One is that many women don't insist on part of their spouse's retirement plan. Second, many women don't understand the basics. For instance, alimony is fully taxable to women. It's a deduction for the man.
All too often, too, women will opt for the house, because they usually have the children. It's natural to feel that keeping the house will provide some stability for the kids, but that may not be the savviest financial decision. It may be an expensive house with expensive upkeep that requires a second income to maintain. Then you're stuck. By far, though, some of the most tragic stories are women who end up divorced, who haven't had a job, and haven't built retirement plans. It's particular a problem when you get divorced later in life, when it almost too late to start a career or saving for retirement.
Q: Many women don't believe there should be a separate discipline for women investors? Do you believe a woman's investment strategy should be different from a man's?
A: I think women should invest just as men should. They should buy the same good stocks, and have the same good portfolio as men. Where there is a huge difference is in their financial planning. They have a longer life expectancy. They are very disadvantaged in terms of resources.
I've worked full-time through my adult life, so I will enter retirement as most men will. That means having built up a pension, having invested in a 401(k), and having Social Security. But I have two sisters, neither of whom has worked full-time through their adult lives. One is working part-time. One went back to work after being home for 20 years. They will enter retirement very differently. They should invest just as I should, in very good stocks, but they are going to have to have a very different financial plan. There isn't some secret investment strategy for women. The difference should be in the financial planning.
Q: Do women behave differently from men as brokerage clients?
A: Our financial advisers have found that women take longer establishing
the relationship, but then you tend to have a longer relationship with them.
We did some studies with women. They are much less inclined to take the hot tip. When the broker calls and says "I think you ought to buy XYZ stock," women take more time to make that decision. They want to read about the stock and understand it a little. So it takes longer. Most of our brokers think that it pays off to spend that time to go through the educational process.
Q: What do you tell married female investors to keep in mind?
A: Women definitely need their own credit rating. A very important thing to understand is that 80% to 90% of women will be alone at some point in life, either through staying single, being widowed, or being divorced. Since they will be handling their own finances, they need to have credit. If you don't have a credit rating, its awfully difficult to take out a loan, get a mortgage, or a credit card.
Q: Do you encourage women to work with other female financial planners?
A: I think you need to work with someone who you are comfortable with personally and someone you have confidence in.
Q: Do you need to have a lot of money to have a financial adviser?
A: There's a critical mass below which it really doesn't pay. If you have $10,000, there's no point in seeing a financial adviser. [If you have less than that,] you should start with mutual funds. You really need some advice as you get somewhere between that $50,000 and $100,000 range.
Q: Looking forward, what are the biggest obstacles women investors face?
A: Women's lives are multitasking. They tend to have more responsibility for the children and aging parents. Plus, many of them are working. Being a good investor takes time. On the list of things to do in life, it's very easy to let investing slip to the bottom of the priority list.
Women by nature tend to let themselves slip to the bottom of the priority list. They think, "I need to educate the kids. I'll plan for my retirement later." That's an obstacle they need to overcome. Sooner is better than later, later is better than never. The earlier you devote the time to doing a financial plan, and start funding retirement, the better.
Q: Are women are beginning to take a more active role in investing decisions?
A: Definitely. I was certainly not brought up to expect that I would be responsible for finances. When I went to college, I remember the advice I got: "Get your teaching certificate in case, god forbid, you should ever have to support yourself." The expectation wasn't that I would go to business school, get a job, and be financially responsible. Baby-boomers have changed that. We see that change with our growing number of women clients. Many are among our most sophisticated investors. That wasn't the case 20 years ago. And the trend shows no sign of slowing.