This article has been written by Geoff Davey for Morningstar's Australian website. Davey is a co-founder and director of FinaMetrica, a Sydney-based risk-profiling research firm.
It may come as no surprise that females are typically less tolerant of risk than males when it comes to investing. Indeed, in two out of three couples, the male is likely to exhibit greater risk tolerance than the female, according to FinaMetrica data.
This can lead to conflict within couples about how to invest their money and pose a challenge for their advisers.
Risk tolerance is relevant to how people manage their financial affairs and, in particular, their investments.
Our psychometric risk-tolerance test is used around the world -- in 23 countries in seven languages -- and 700,000 tests have been completed over the past 15 years.
We've discovered some significant trends in how men and women view risk.
To briefly explain our test, risk-tolerance scores are given on a 0-to-100 scale, with a mean of 50 and a standard deviation of 10. Scores are distributed in the familiar bell curve as shown below.
Let's look at what our data reveals.
|
Male |
Female |
| Average score |
52.4 |
46.8 |
| In a couple, the more risk tolerant of the two is |
65.80% |
34.20% |
The average scores for males and females are at the upper and lower ends of the middle risk group.
Within a couple, a difference of this size is unlikely to be an issue. However, if the difference is 10 points or more, then there will be a material difference in the level of risk they would prefer to take.
How likely is a difference of this size within a couple?
Difference less than 10: likelihood of 40.60%
Difference of 10 or more: likelihood of 59.40%
So, in 60% of couples there will be a material difference in their risk-tolerance levels. Who is likely to be the more risk-tolerant of the two?
|
Male |
Female |
| Difference of less than 10 |
59.40% |
40.60% |
| Difference of 10 or more |
83.80% |
16.20% |
Where there is a material difference, the male is far more likely to be the more risk-tolerant of the two. However, that's not always the case. In one in six couples, it will be the female who is the risk-taker.
So why does risk tolerance matter? Risk tolerance is a comfort zone where the individual strikes a balance between making the most of their financial opportunities and putting their financial well-being at risk. It is a function of genetics and life experiences.
It is possible to have, on the low side, too little risk, and on the high side, too much risk. In terms of investment portfolios, the comfort zone can be expressed as the percentage of growth assets in the portfolio. Growth assets include equities, property and commodities.
If we imagine a couple, Bill and Suzy, with risk-tolerance scores of 40 and 60, their respective comfort zones are:
|
Risk tolerance |
Growth assets comfort zone |
| Bill |
40 |
23% - 42% |
| Suzie |
60 |
56% - 75% |
Clearly, there is no overlap here. If Bill and Suzy needed the return from a 65% growth assets portfolio to achieve their goals, while Suzy would be comfortable with the risk involved, it would be too much for Bill and some compromise would be required.
Bill might be able to stretch to a 55% growth assets portfolio, but 65% would probably be a step too far.
In the next bear market, Bill would be at best extremely uncomfortable, which could trigger a sell-off at the worst possible time.
Obviously, this means for couples acting jointly, the risk tolerance of each must be known and considered in any financial plan.
Each person should complete their own risk-tolerance test rather than doing one jointly. This will reveal any differences in risk tolerance, which need to be addressed by the couple themselves or their adviser.
If one of them takes primary responsibility for making financial decisions, the couple could agree to proceed according to that person's risk tolerance. Or they could choose to go with an asset allocation suited to the less risk tolerant of the two, or they could average risk-tolerance scores and then proceed.
But in all cases the couple must give informed consent to any financial plan a financial adviser recommends to them.
Interestingly, while this male/female difference is a global phenomenon, its magnitude varies. In Australia, New Zealand, Canada and the United States, the male/female difference is more or less the same, but in the UK females are comparatively less risk tolerant.
This indicates the difference is not just a sex difference but is also influenced by cultural factors.
