Bible Finance

Manage Your Money God's Way

Investing—Avoid “Get-Rich-Quick Investments” and Hasty Decisions

In my experience, the following are the common elements of a “get-rich-quick investment.”

 

1.      There is a promise of an abnormally high rate of return. If the expected rate of return is unusually high, then the risk associated with that investment is also unusually high. Hence there is a risk of very significant losses. If it sounds too good to be true, then it probably is.

2.      Generally, the investor has limited understanding of the investment. It is easier for a salesperson to sell you a high-risk investment when it is outside of your expertise.

3.      It usually requires a quick decision that will prevent the potential investor from obtaining independent counsel from someone who has a thorough understanding of the investment.

4.      Frequently, debt is utilized because debt increases the returns if the investment is successful; but debt also increases the losses if the investment goes sour.

5.      Generally, a get-rich-quick investment is not diversified in accordance with Ecclesiastes 11:1, 2 but is focused on one investment or one sector, which increases the return if the promoters are right in their predictions, but it also increases the losses if they are wrong.

 

God clearly warns of the dangers of trying to get rich quick:

Do not wear yourself out to get rich; have the wisdom to show restraint. Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle. (Proverbs 23:4–5)

The emphasis in scripture is to save and accumulate a little at a time over a long period of time and not to try to get rich quick. Proverbs 13:11 states, “Dishonest money dwindles away, but he who gathers money little by little makes it grow” (emphasis added).

 

As explained in my Financial Moment titled “Investing—Assess Your Tolerance for Risk and Invest Accordingly,” it is biblical to assume some risk within your investment portfolio. However, when investors try to make a lot of money very quickly (i.e., to get rich quick), then generally they assume an excessive amount of risk and debt, and they frequently lose everything. This is not God’s will.

 

Therefore, if someone recommends an investment that promises an abnormally high rate of return, or requires a significant portion of your portfolio, then I recommend the following:

 

1.      Pray and ask God to direct you through his Holy Spirit. A lack of peace can be God’s way of communicating to you or your spouse that it is not God’s will for you to invest.

2.      Ask God to reveal to you your motives. Motives are important to God (Proverbs 16:2). Ungodly motives include greed, covetousness, impatience, and pride; the corresponding godly motives would be generosity, contentment, patience, and humility.

3.      Take the time that is required to obtain sufficient knowledge and understanding of the investment before you invest (Proverbs 28:19, 20).

4.      Use godly counsellors who have the necessary experience and knowledge and will not personally profit if you decide to invest (Psalm 1:1–3).

 

In summary, if you do not have sufficient time to complete the four suggestions above, then do not invest. Some of the best investment decisions ever made are the decisions not to invest. Hasty decisions are usually bad decisions (Proverbs 21:5). And remember, the emphasis in God’s Word is to save and accumulate assets for future needs over a long period of time—not to get rich quickly.

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September 16, 2008 Posted by | Investing | , , , , | 1 Comment

Investing—Assess Your Tolerance for Risk, and Invest Accordingly

In Ecclesiastes 11:1–6, God recommends the assumption of a reasonable amount of risk within your investment portfolio. “Cast your bread upon the waters, for after many days you will find it again” was a metaphorical expression used in the grain trade that illustrated the potential successful prospects of a business investment. God instructs the farmer, who is also an investor, to “sow your seed in the morning, and at evening let not your hands be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well.” In addition, over cautiousness is discouraged——“whoever watches the wind will not plant; whoever looks at the clouds will not reap.”

 

In Proverbs 31:10–31 the “wife of noble character” is involved in several equity-type investments. For example, in verse 16, “she considers the field and buys it; out of her earnings she plants a vineyard.” There are many other examples of investors in the Bible, such as the servants in the parable of the talents (Mathew 25) and Solomon and Job.

 

In short, it is biblical to assume some investment risk. However, God demonstrates how to minimize your risk by diversifying your investments into seven or eight different categories, because you do not know what disaster may come upon any particular company or sector of the market (Ecclesiastes 11:2.).

 

On “a macro basis,” the risk of any portfolio is generally reflected by its allocation between equities and safe investments such as Canada bonds/GICs, etc. The appropriate amount of investment risk that a Christian should assume will depend upon numerous factors, such as your age, when you will need the money, and your tolerance for risk.

 

Assessing your tolerance for risk can be difficult. Generally, it is necessary to experience some good and bad markets before you will really understand your own personal risk tolerance. Certainly, if your present portfolio allocation is too volatile (i.e., the fluctuations cause you to be anxious) then reduce equities and increase Canada bonds. In his book, Sound Mind Investing, Austin Pryor has an excellent questionnaire that can help you assess your tolerance for risk. (See soundmindinvesting.com.)

 

Based upon God’s investment principles, I believe that it is not appropriate for a Christian to be overly cautious (which may reflect a mindset of fear); nor is it appropriate for a Christian to be too aggressive (which frequently reflects an attitude of greed). Both extremes are outside of God’s will.

 

Under normal market and economic conditions, generally a conservative investor should have at least 20 percent in equities, while an investor with a higher tolerance for risk, should not go beyond 80 percent. The average person may feel comfortable with an allocation of approximately 50 percent in equities. The types of equity investments within your portfolio (i.e., “blue chip stocks” as opposed to “speculative stocks”) will also affect the level of risk you are assuming. In all cases, I strongly recommend that no debt be used for investments, because God’s Word strongly discourages the use of debt (Proverbs 22:7).

 

In summary, depending on God’s wisdom (James 1:5), assess your tolerance for risk and diversify your investments according to Ecclesiastes 11:1, 2. In all cases, pray and ask God to guide you according to his specific will for your life (Psalm 32:8).

September 1, 2008 Posted by | Investing | , , , , | Leave a comment