Bible Finance

Manage Your Money God's Way

Investing—Diversification (1 of 2)

Over the years, I have seen too many cases where an individual has invested the majority of retirement funds in one company or in one sector. For “a season” these investments may do well, but inevitably every company and sector falls on bad times. This results in significant losses because the portfolio was not diversified in a manner that was consistent with God’s Word.
Because no human can consistently predict the direction of any market (see James 4:13–15), it is important to diversify your assets into different categories of investments that will likely react differently to any given market condition. The Bible recommends this type of diversification.
“Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land.” (Ecclesiastes 11:1, 2)
At the time this was written, “Cast your bread upon the waters” was a metaphorical expression used in the grain trade that illustrated the potential successful prospects of a business investment. In short, it is biblical to take some risk within one’s investment portfolio. However, verse 2 recommends diversifying your investments into several (e.g., seven or eight ) categories, because you do not know what disaster may come upon any particular company or sector.
In 1999, I met with a client who had invested most of his money in one sector—technology stocks. I recommended that he diversify his portfolio in a manner consistent with Ecclesiastes 11:1, 2. He believed he was diversified because he owned 25 different stocks. During the bear market (2000 until 2004), the lack of biblical diversification within his portfolio cost him dearly —about a 70 percent decrease in value!
Biblical diversification is obtained by allocating one’s assets into different types of investments that will probably react differently to any particular market condition. Here are some examples:
• During inflationary times, real estate and natural resource equities generally increase in value, while medium- and long-term bonds do very poorly.
• In a period of decreasing inflation (such as 1991 to 1995), medium- and long-term bonds generally will increase in value, while real estate and natural resource equities do poorly.
Many investors try to “time the market”—that is, they buy when they believe that the market is headed higher and then sell when they believe that the market is going lower. God’s Word says (and history shows) that no human can consistently predict the future value of any market or stock (Proverbs 27:1). Hence, there is a need for biblical diversification in one’s portfolio.
Since only God knows the future (Isaiah 46: 9, 10), then the only possible way to be able to “time the market” with any consistency is in total dependence upon God for his specific direction (see John 15:5, Psalm 32:8). Over the years, I have seen a few situations where God has revealed the direction of markets to his children.
In summary, it is biblical to take on a reasonable amount of risk within one’s investment portfolio. However, God recommends diversification. This will reduce the risk and volatility of your portfolio.
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March 28, 2008 - Posted by | Investing | , , , ,

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