2Divide your gifts among many, for you do not know what risks might lie ahead. (Ecclesiastes 11:2, NLT)
The Daily DAVEotional
The Bible has a lot to say about money and wealth. Despite what many people in our culture think today, the Bible doesn’t condemn wealth or making money. Actually, Jesus himself encourages the wise steward to multiply the resources entrusted to him/her by God and to seek to make a profit. I’ve written a number of blog posts on the subject of whether wealth is immoral. You can read my previous posts here, here and here. Additionally, I wrote about God’s stance towards the rich here.
Though the Bible encourages people to make a profit and to multiply their financial resources, it doesn’t give a lot of guidance on how exactly we’re supposed to do that. When it comes to investing, the Bible has little to say that will yield any specific steps or strategies to guide us.
There is one verse however, that gives some financial wisdom on the topic of investing, and it’s found in Ecclesiastes 11:2.
In this verse, Solomon tells us to divide our “gifts” among many in order to hedge against risk.
What’s he talking about?
I like the way the NIV states this verse. It says it this way:
2Give portions to seven, yes to eight, for you do not know what disaster may come upon the land. (Ecclesiastes 11:2, NIV)
In this verse, Solomon is encouraging the reader to divide his investments into 7 or 8 different portions. Essentially, he’s encouraging the reader to diversify their assets in order to hedge against a potential disaster.
I found a blog post by Alice A. Anacioco to be especially helpful. She explains this passage this way:
You may be surprised to read King Solomon offering financial counsel as he nears the end of Ecclesiastes. But accordingly, Solomon was deeply involved in international trades with merchants. And just like today, one of the main trade commodities was grain.
The merchants of Solomon’s day would load their grains on ships and send them off. But instead of loading all of their grains in just one ship, he tells his merchants to put them in several ships and send them out in a diversified way so that if one of the ships should sink, he would not lose everything.
The main advice the Bible gives when it comes to investing is to diversify your investments. The idea is to spread your money out among different types of assets so that if one type of asset is negatively impacted by an economic event, the other assets may be unaffected and as a result, the entire portfolio will not be completely devastated.
Be careful though. Many people assume they are following this advice because they have placed their investment money into mutual funds. Many financial advisors will advise their clients to diversify their stock portfolio among many different stocks so that if one company performs badly, the positive performances of the other stocks may shield the portfolio from being completely torpedoed.
Mutual funds provide some level of inherent diversity because a mutual fund is already a portfolio of many stocks. Hence, if one company within the fund goes down, other companies may go up and thus the value of the fund may go up as well despite the poor performance of one or a few companies.
But being invested in a number of stocks or even mutual funds does not mean you are diversified. To truly be diversified and hedged against disastrous economic events, one needs to have their funds invested in different asset classes altogether.
Think about it. Stocks and mutual funds are part of the same asset class. When the market crashed in 2000 due to the dotcom bubble bursting, many people who had all their money in the stock market had their entire portfolio decimated. Again, in 2008 when the market crashed as a result of the real estate bubble bursting, many who were “diversified” because they owned many different stocks or mutual funds took major hits to their bottom line.
I have heard and seen too many stories of people who had their entire nest egg cut in half or worse by one of these two market events. And for those who were in retirement when it happened, the results have been disastrous. There simply is no time to rebound from these market crashes when you’re already taking disbursements during retirement.
Solomon’s advice is basically “don’t put all your eggs in one basket”. So if you really want to diversify, don’t have all your money in stocks and mutual funds. Invest in other assets as well (such as real estate, precious metals, commodities, etc.) That way, if the stock market crashes, as it inevitably will do, only a portion of your entire portfolio will be affected. And who knows, even while the market is crashing, perhaps the other assets will be unaffected or even increase. You may find that you are gaining overall instead of losing it all.
What is or has been your investing strategy?
What steps have you taken or are you taking to diversify your financial portfolio?
Besides stocks and mutual funds, what are some other asset classes you could invest in to begin to create a truly diversified portfolio?