By Craig Erwin, Ph.D.
When you are young, there are both benefits and dangers to speculating (making risky bets to try to make a quick buck). But when you are older, speculation has no benefits; it’s just incredibly dangerous. Male students have always been eager to tell me if they invest or speculate, although it is more common for them to speculate than to invest (accumulate wealth by buying and holding assets over the long term). It is quite rare, however, for female students to discuss money with me. I have often wondered why.
It’s possible that it’s a good sign that females rarely discuss money with me; perhaps it signals that they don’t speculate like males do; speculating tends to make one poorer. But it may also signal that females are not interested in accumulating wealth or they may not think it is relevant (at least not currently).
If female students are simply waiting until they have enough income (after college) to start building wealth, that makes sense. But, if they still have no interest in wealth accumulation after university graduation, that is a problem. It is critical that they start saving and investing as early as possible, but no later than when they graduate from college and start their first job. To delay would almost certainly mean that they would accumulate far less wealth, leading to uncertainty about if, how, and when they would be able to retire. The first decade of saving and investing following university graduation can make all the difference in accumulating sufficient wealth for a comfortable retirement.
It is widely believed that women tend to be more risk-averse than men. Women often take as little risk as possible with their money, preferring savings accounts and CDs, whereas men are more attracted to risky investments such as stocks and real estate. The German Institute for Economic Research (DIW) found that women may appear to be more risk averse than men because they tend to have less money to invest than men. Women tend to have about half as much money to invest as men for a variety of reasons (e.g., lower salaries, part-time employment, being attracted to lower paying careers). But, the DIW found that, if women had more money, they might be more willing to take risks with it.
Although speculation is essentially gambling, it may provide young men with an introduction to investing and wealth creation. Unfortunately, it may also cause them to become compulsive gamblers. If they become addicted to the thrill that comes from placing a risky bet with the slim chance of a big payoff, that spells trouble. If, instead, they learn that speculation is a loser’s game and they give it up for more effective and reliable wealth accumulation methods, then speculating may simply be an introduction to investing.
When I first started buying stocks and bonds, I didn’t know the difference between speculating and investing. Although I lost money in all sorts of ways, fortunately I learned from my many mistakes. Today I am benefitting from learning those investing lessons the hard way. I believe it is important for people to start investing while young, so they can learn what works and what to avoid. Of course, they will lose money, but they need to gain experience and make mistakes before they have enough money to suffer big losses. This can help them establish good investing patterns so they can accumulate enough wealth to retire.
Youthful speculation can be either an introduction to legitimate wealth accumulation methods or a gateway to lifelong problems with gambling and addiction. But, based on the observations I have made in 25 years of teaching, this appears to apply primarily to men, not women. This makes cause men to become interested in investing and wealth accumulation earlier than women. Unfortunately, women tend to be less interested in investing than men, so many women may never become interested in investing. That’s hazardous. If women are to prepare adequately for retirement, they must develop an interest in investing and wealth accumulation; the earlier the better. If not, they are likely to face the same problem that millions of elderly American women commonly face today – poverty.
For many years I have considered it a moral obligation to share with my students the importance of saving and investing. The consequences of failing to save and invest are depressing. Our country faces a very frightening future if its residents fail to save and invest sufficiently for their golden years. We need to broadcast the message by any means necessary.
Very few people can expect to receive a pension when they retire. Thus, for most, saving and investing for retirement are not optional. That’s the only way most individuals can ensure they do not retire in poverty.
Watch this video to learn about different approaches to preparing for retirement.
The following blog posts examine the financial challenges women face.