What Does a Biblical Investment Portfolio Look Like?
In God's word we find wisdom. James 1:5 (ESV) says, "If any of you lacks wisdom, let him ask God, who gives generously to all without reproach, and it will be given."
His word reveals Himself leading us to worship Him, and His word reveals how He intended us to live a flourishing life. When the Bible was written there wasn't a stock market; there weren't mutual funds; there wasn't our current concept of retirement. However, we can find solid biblical wisdom to apply to our investment portfolios.
While there are "Christian Mutual Funds" or Biblically Responsible Investments available, in this article we will focus more on constructing an overall portfolio - not the individual investments.
Another thing to note before jumping in: When it comes to financial advice, nothing is one-size-fits-all. Everyone is in a different situation, with different restrictions, to reach different goals. There isn’t one investment philosophy, model, or allocation that works for everyone.
What is Your Target?
In Luke 14:28 (ESV) Jesus is talking about the cost of following Him, and he mentions that no one would build a tower without first counting the cost. "Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him." While this was a common piece of wisdom at the time, it can be lost in our current time period. We have access to credit cards, personal loans, mortgages, etc. which allow us to have what we want when we want it and to find a way to pay for it later.
To reconsider this wisdom of counting the cost, it's important to know how much you’re expecting to spend. Whatever you’re investing for (home down payment, starting a business, retirement, etc.), get a good understanding of what this will cost you. For more uncertain costs (like retirement or financial independence) consult an expert. A CERTIFIED FINANCIAL PLANNER™ professional should be able to customize a retirement projection to your situation to help find the "cost."
When it comes to building an investment portfolio for each of these targets, you should set your expectations for the amount of return/risk, which are correlated, you need in order to stay on track. In many scenarios, you don’t need to earn the highest return possible on your investments. There may be some longer-term targets that can afford a higher rate of return/risk than targets that are more quickly approaching.
Remove far from me falsehood and lying;
give me neither poverty nor riches;
feed me with the food that is needful for me,
A faithful man will abound with blessings,
but whoever hastens to be rich will not go unpunished.
A stingy man hastens are wealth
and does not know that poverty will come upon him.
Better is a little with the fear of the Lord
than great treasure and trouble with it.
In these Proverbs we can find wisdom by not hastening after riches or trying to have the highest possible return on your portfolio at all costs. It’s important to know what return/risk level you need and adjust your investments accordingly.
You may be in a situation where you have funded your target goals and you still have excess funds to invest. If you've counted the cost and set those funds aside at an appropriate return/risk level, then you can be more risky with your excess funds that you have to invest because you have funded your other goals. It would be important to consider other uses of those excess funds, though (you may have the opportunity to pay down debts or be generous with them).
Diversification
Diversification is likely one of the most well known principals in portfolio construction. Don't put all your eggs in one basket. Much of the economic research around diversification was done in the late 1900s, but God's wisdom significantly preceded this.
Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.
The metaphor found may be lost in our current context, but a likely interpretation is that it was referring to maritime commerce. Even with the hazy understanding of the metaphor the end of it is fairly clear. There is uncertainty on earth, so divide what you have.
Although most of us know to diversify, it can be hard to know how to put it into practice. For example, you can hold 10 different mutual funds, but if those 10 mutual funds hold very similar investments, then you aren’t diversified. Similarly if you have money at separate financial institutions, in separate accounts, but still hold similar or overlapping investments you also aren’t very diversified.
Here are some areas to consider diversifying for you portfolio
Diversity in the number of companies you are invested in. A mutual fund does this well by holding many different companies. This reduces your company-specific risk. If the CEO of a specific company has a scandal, you will not be as directly impacted.
Diversity in the countries/regions of your investments. Each country has its own economic cycle, and there will be times when other countries or regions of the world will outperform the US.
Diversity in the types of investments and the return-drivers. In general, bonds (more conservative investments) perform differently than stocks (more aggressive investments). To hold both bonds and stocks in your accounts allows you to have a buffer when one type performs poorly.
Tax diversity is often a forgotten area when it comes to diversifying your portfolio. Having some tax-free accounts, some tax-deferred accounts, and some taxable accounts for your portfolio can help with more advanced planning techniques when you need to withdraw from your accounts in retirement. It’s important to consider your specific tax situation when making these decisions.
Finding Rest
If you've worked with a financial advisor before then it’s likely that you’ve taken a risk tolerance assessment. This is a tool used to measure your comfort level when it comes to your investment portfolio's risk. It attempts to quantify the feelings that you have towards your portfolio and at what risk level you might start to feel discomfort and anxiety. This is another principle we can find from the scriptures.
Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God. And the peace of God, which surpasses all understanding, will guard your hearts and your minds in Christ Jesus."
Unnecessary risk within your investment portfolio may add to your anxiety about your financial situation, which distracts us from the truths that we find in God's word: That He is trustworthy to provide for us, and that we can be fully satisfied in him.
Along with avoiding unnecessary (or excessive) risks in your portfolio, having a trusted professional can help reduce stress as well.
Listen to advice and accept instruction, that you may gain wisdom in the future.
Where there is no guidance, a nation falls, but in an abundance of counselors there is safety.
Without counsel plans fail, but with many advisers they succeed.
Conclusion
We weren't created to go at it alone. Crafting an investment portfolio can be an overwhelming task to do on your own. Make sure that you have biblical counsel in all areas of your life, including your finances. If you don't know a Biblically-focused financial planner, any of the members of the Christian Financial Advisors Network would be happy to chat with you. They are all held to high standards of excellence in providing biblical advice.
Subscribe below for more insights on personal finance from a Biblical perspective!
