Mommy, are we there yet?

Certified Financial Planner Palesa Thloloe says women need a well-structured financial plan to ensure a secure future for themselves and their children, and also to have an enjoyable journey getting there.

With it being Women’s Month, it's an apt opportunity to hone into matters that pertain specifically to female investors.

A number of studies, including a 2021 research piece conducted by McKinsey on 5 000 European investors found that when asked about their attitude toward riskiness in investments, a larger share of women than of men (42% versus 34%) reported taking a risk-averse approach to asset allocation. The study found that women are less likely to invest into equity and have a preference to fixed income assets instead. Male investors in the study reported having an average 45% allocation to equity compared to 32% held by women. Furthermore, women held 32% of their portfolio in fixed-income assets while their male counterparts reported an average 24% holding.

It goes without saying that a caveat is necessary here, that generalisations on the basis of gender are far from perfect and that the reasons women score as more risk averse are numerous. These may vary from simply being an evolutionary “hangover” where men still rely on an instinctive fight-or-flight response to danger, whereas women are more hardwired as caretakers and thus take a more careful approach to looking after resources.

Women, particularly those in partnerships have historically occupied a back seat when it comes to family finances, and the decision making and provision responsibility was that of the male provider. Again this trend is rapidly changing and there are many other nuances that we could delve into to explain this preference.

Another challenge that women continue to contend with is the income disparity between themselves and their male counterparts in similar jobs. This gap is partly explained by the fact that women either take time off work to raise children or have to split their time and attention to a career and to family matters in a disparate proportion. South African women continue to battle a persistent income disparity of between 23% and 35% in favour of their male counterparts.

In South Africa, approximately 38% of households are headed by women. The income disparity results in female-headed households being approximately 40% poorer than those headed by men. These factors make it a necessity for women to be far more deliberate about their financial planning and wealth management arrangements. Wealth holders generally desire the same things, which is to provide sufficiently for their loved ones as well as for themselves to enjoy the fruits of their labour, doing those things that are most meaningful to them.

Define your goals

I liken this endeavour to a family road trip from the city to a beach destination of your dreams. Your dream destination is chosen based on what you like and value most in a holiday experience. Similarly your personal financial goals need to be aligned to your values and the aspirations you have for yourself and loved ones. Partnering with a Certified Financial Planner (CFP) professional can set you well on the path to articulating these goals and putting the appropriate plans in place to ensure that you achieve them.

Mapping out the road ahead Whether you take the quickest or the most scenic route also depends on your preferences and may seem like a straightforward decision process while you are at the planning stage of the trip. But life is seldom straightforward and instead throws curve balls that your plan will need to robustly respond to if you are to stay the course and eventually arrive at your destination. So, your plan needs to take into consideration some planned life transitions such as having children, getting married, purchasing a bigger home as your family’s needs change, career progression and the like. The curve balls may be a divorce, retrenchment, illness or an untimely death. A sound financial plan needs to address the expected but also make provision for the unforeseen to ensure that you and your family continue to enjoy your chosen lifestyle.

Mind your risk appetite

As beautiful as the scenery on your route maybe for you, the question inevitably comes, especially from impatient and easily bored young passengers who’ll be screaming “Mommy are we there yet?” A mommy knows her clan very well and therefore would have taken this into consideration when planning the trip and taken all sorts of activities the keep the little ones occupied until you get there.

Similarly, when structuring an investment portfolio it is important to consider what the goal is, what the time horizon is for such a goal and how much risk you are willing and able to assume, in order to achieve the investment goal. The combination of these considerations culminates into an appropriate asset allocation for your needs and ensure that you neither assume too little or too much risk for your requirements.

There is an abundance of research that points to the asset allocation decision as the primary driver of investment returns of a portfolio. That is to say, how much of your portfolio is allocated to local and global equity, cash, government and corporate bonds as well as property.

While women may be more risk averse, a CFP professional can assist you in structuring an appropriate portfolio, set out what kind of returns you can expect from the portfolio and guide you with regards to how much volatility you can expect from such an investment over time.

An important discussion that should be had is about maintaining your composure in periods when there is a marked drop in market prices. Think back to the market crashes of March 2020 or in 2008. Irrecoverable damage is done when investors panic during such market downturns and opt to disinvest into cash. The role of your financial planner in such instances is to help you adhere to your investment strategy where it still makes sense in such circumstances.

How will we get there?

The risk and investment vehicles (or products) most appropriate for your needs are again an important consideration at the onset of the planning process, not only for the initial stage, but they also need to be able to adapt to your changing requirements over time. This talks to the fact that a financial plan must be reviewed regularly to ensure that it is still appropriate for the life stage you’re currently at.

Here is a short synopsis of products you may encounter which may be appropriate in your financial plan:

● Discretionary investments: For investors who want to invest aftertaxed capital over the medium to long term in a combination of solutions investments such as collective investments, guaranteed products, managed solutions and/or direct share portfolios. Tax is payable on interest earned, dividends received and on any capital gains realised when on disinvestment

● Tax-free savings accounts: For investors who want to invest after-taxed capital over the medium to long term and benefit from a tax-free return. Contributions are limited to a maximum of R36 000 in a tax year, with a lifetime contribution limit of R500 000. The investment is fully liquid at any time.

● Endowment policies: Can be used by high-net-worth individuals who have a marginal tax rate higher than 30%. An endowment policy is a suitable investment vehicle for investors who want to invest after-taxed capital over the medium to long term. Tax on investment income is withheld at source (in the endowment) by the administrator at a rate of 30%.

● Retirement funds (retirement annuities, pension and provident funds, preservation funds): Can be used to preserve retirement capital; and/or save towards retirement, in a tax-effective way. Contributions into a retirement fund are tax deductible up to a maximum of 27.5% of your gross income, with a maximum of R350 000 per tax year. No tax is payable on interest earned, dividends received or any capital gains made while in the retirement fund. Tax is due on withdrawal (where applicable) according to the taxation laws that apply at the time of withdrawal.

● Insurance) products: A combination of life cover, lumpsum disability cover, income protection, dread disease cover, and funeral cover may be necessary at certain stages of your life but need to be reviewed periodically to ensure suitability.

Last word

The journey to your destination should be just as enjoyable and pleasant as the holiday itself. Our own biases and fear of the unknown are often what stands in the way of you achieving your financial goals. Taking the decision to start and then partnering with a CFP professional who understands you and who can act as a coach and accountability partner is a great way to embark your journey to creating and safeguarding your hard earned wealth.

Palesa Thloloe, CFP, is co-founder and wealth manager at Imvelo Wealth Solutions. The article is for information purposes only and is not intended as financial advice in the legal definition of the term.