Who's Taking the Risks?

I went to Central High School of Philadelphia. I hear it now. Big whoop! Actually, it is. It is the oldest public high school in the country (founded 1836), the second oldest high school in the U.S. (Boston Latin is first), and was originally called Centre College, as part of the University of Pennsylvania. It had only boys and you needed to pass an entrance exam to get in. If you graduated at a certain level, you would be granted a Bachelor of Arts degree as set by the state. And, my other claim to fame is that Bill Cosby and I were classmates.

When I say all boys, I meant it. The only females around were the librarians. All the teachers were men.

Next door to Central was LaSalle College, another bastion of males and at the end of the school day, the old Number 26 trolley car (yes, I am going back more than a few years) would be one big testosterone trip. Any female worth her soul would stay away.

Now, all of this comes up because of something I just read. It seems that Mike Roszkowski, the director of institutional research at my neighbor LaSalle has just released a special report, co-authored with John Grable of Kansas State University, titled "Gender Stereotypes in Advisors' Clinical Judgments of Financial Risk Tolerance."

Roszkowski says that the most common assumption when it comes to money and investing is that men are more tolerant of risk than women and this could be needlessly costing women valuable portfolio returns.

The analysis set out to see how accurately financial advisors gauge their male and female clients' risk tolerance. Roszkowski discovered that financial advisors, whose job it is to know and understand clients' needs, have a distorted sense of the risk tolerance of men and the risk aversion of women.

As Roszkowski notes in the report, risk tolerance is considered one of the most important personal circumstances an advisor needs to learn about a client. And too often, he found, they get it wrong. "If you ask why are women earning lower returns on their investments, part of it is that they are in fact lower risk-taking. But it's also because financial planners tend to assume they're more risk averse and will not even advise certain riskier investments that may give higher returns."

In the study, Roszkowski asked financial planners to give him a 10-point rating of their clients for risk-tolerance analysis. Result? Financial planners tended to overestimate the risk tolerance of male clients and underestimate the risk tolerance of female clients. In other words, the rating should've been higher for the females and lower for the males. “They're penalizing women.”

What these planners have to realize is that women today have become more involved in the work force and taken more control of their finances. They're more educated about their investments. Unknown risks loom larger than known risks.

So, you have to think about this in the aggregate. It’s been said by many experts that on average, people who invest in riskier products do better in the long run. Of course, you have to include in that bottom number those people who lose their money in riskier investments.

This whole business about investing goes along with risk tolerance and perhaps the bottom line is that you should invest in things that will let you sleep at night.

Maybe that’s why my wife is a better sleeper than me. 

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