Women, Risk, and What's Left on the Table

Women are often praised as “careful” investors, but there’s a fine line between careful and constrained. When you earn less over a lifetime, take more career breaks, and live longer than men, holding too much cash or ultra‑safe investments quietly raises your risk of running out of money later. The market’s ups and downs can feel scary, yet over decades, growth from stocks has historically been what turns steady saving into real wealth.

An great way to combat the perception, realty, and feeling of risk is through the construction of an evidence-based and efficient portfolio based on Modern Portfolio Theory(MPT).

At its core, MPT has four tenets:

• Each investment has an expected return and a risk (usually measured as volatility of returns).

• Risk isn’t just about how “bouncy” each holding is; it’s about how your holdings move together.

• By combining assets that don’t move in lockstep (low or negative correlation), you can reduce overall portfolio risk without necessarily giving up return.

• For every level of risk, there’s an “efficient” portfolio that gives you the highest expected return.

For example, in their excellent book Your Complete Guide to a Successful and Secure Retirement, Larry Swedroe and Kevin Grogan compare the returns and risk of Portfolio A (60% S&P 500 Index / 40% 5‑year Treasury notes) and Portfolio B (12.5% Fama/French US Small Cap Value Index / 12.5% Dimensional International Small Cap Value Index / 75% 5‑year Treasury notes) over the period 1982–2017, see below:

Portfolio A Portfolio B

Annualized Returns / Standard Deviation 10.4/10.2 9.6/7.1

Years with Returns Above 15% / Below -15% 11/1 9/0

Years with Returns Above 20% / Below -20% 7/0 2/0

Years with Returns Above 25% / Below -25% 2/0 2/0

Worst Year Return / Best Year Return (%) -17.0/29.3 -1.5/28.0

Number of Year with Negative Returns 5 3

In other words, Portfolio A's annualized returns were only 7.6% greater than Portfolio B's, however it was 42.8% more volatile. The worst return in any year for Portfolio B was -1.5%. A portfolio constructed like Portfolio B using MPT is a terrific option for women with a long term investment horizon, and deep and valid concerns about risk. This approach maximizes returns, while substantially reduces volatility.

*AW4W does not receive any direct or indirect financial benefit from this recommendation.