How Financial Advisors Can Help Women Manage Investment Risks

Dr. Odiri Oginni is Managing Director and CEO for United Capital Asset Management Limited.

Women often view risks cautiously when making investment decisions. However, risk is a critical component of wealth building and financial independence, and learning to manage it confidently is essential for women aiming to grow their wealth.

Interestingly, research suggests that when investors consider short- and long-term investment goals separately rather than together, they tend to allocate more to risky assets, especially to long-term goals. This idea is rooted in the concept of mental accounting bias, the tendency to assign different mental categories to money based on its source or intended use. This bias arises because people tend to feel differently about money depending on how it was obtained. For instance, women might feel more comfortable spending money from a bonus on a treat for themselves or loved ones, while being more conservative with regular income.

Financial advisors can leverage mental accounting to help women manage investment risk by aligning financial strategies with their natural decision-making tendencies in the following ways:

Segmenting Goals By Mental Accounts

Women can set specific goals to align with their different financial needs and time horizons such as retirement, education or emergency savings. Advisors can help create separate “mental accounts” for these goals and allocate investments accordingly based on the level of risk they are intended to carry. For example:

• Safety Account: Investments in low-risk assets for emergencies.

• Growth Account: Long-term investments with higher risk tolerance for retirement.

• Legacy Account: Moderately risky investments for generational wealth transfer.

This mental accounting structure psychologically separates riskier assets from their core financial foundation. This segmentation helps women feel more in control and secure about their financial decisions.

Using Loss Aversion To Reframe Risk

Women, on average, are more risk-averse than men. Financial advisors can reframe risk by focusing on the potential long-term benefits rather than short-term volatility. For example:

• Highlight how market fluctuations in the growth account are normal and expected for long-term wealth building.

• Use historical data to demonstrate the likelihood of achieving financial goals despite temporary losses.

Matching Risk To Account Purpose

Research shows that women often associate risk with negative outcomes. Advisors can align the perceived purpose of the account with its risk level, such as:

• High-risk investments tied to accounts with longer-term horizons, like retirement.

• Low-risk options for accounts meant for short-term goals or safety, reducing anxiety about immediate needs.

When riskier investments are earmarked for long-term goals such as retirement or wealth accumulation, it becomes easier to stay resilient through short-term market fluctuations. This approach not only enhances investment discipline but also empowers women to balance risk and return across their financial journey confidently.

Encourage Play Money For High-Risk Investment

Advisors can encourage women to allocate a small portion of disposable income, specifically as “play money,” for higher-risk investments. When money is earmarked as “play money,” it mentally separates it from core funds such as savings or essential living expenses, making it easier to tolerate market fluctuations. Knowing that this portion is noncritical provides the freedom to take calculated risks without the fear of negatively impacting overall financial stability. Moreover, by taking small, manageable risks, women can build confidence in investing over time and gain firsthand experience with potentially higher-return assets. Over time, this hands-on learning can increase comfort with more growth-oriented investments and lead to a greater willingness to diversify into riskier yet rewarding opportunities.

In Conclusion

Mental accounting provides a structured way for financial advisors to address women’s risk concerns while helping them balance growth and security confidently across their financial goals. By designating funds as purpose-driven accounts, women can balance risk with stability and embrace investment opportunities that align with their financial goals.

In addition, allocating “safety money” (emergency funds, safe assets) and “growth money” (investments in equities or riskier assets) into distinct mental accounts provides peace of mind. Women are more likely to embrace high-risk, high-return opportunities if they know that their essentials are protected. This separation fosters confidence in making bolder investment decisions without feeling that their entire financial future is at stake.

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