The subtitle of this blog is, "save diligently, invest wisely, give generously, live abundantly." I included investing in the mix because it is a very important part of retirement stewardship.
It is wise to invest, especially for the long term, for things like college and retirement. Investing is actually condoned in Scripture (Ecc.11:1-2; Prov.21:20; Matt.25:14-20), but the main message is investing in God's Kingdom, so the priority is rightfully placed on investing in eternal things (Matt.6:19-24).
This article is about long-term investing, but not specific investments. (I don't give investment advice because I am not an investment professional or financial advisor.) It's about our attitudes, beliefs, and behaviors and how they impact our approach to investing.
There are a few fundamental principles (you could also think of them as character traits) that should shape our attitudes and behaviors when it comes to investing from a biblical perspective. They are simplicity, patience, moderation, and humility. These have as much to do with investing success as the specific investments we choose and other practical things we do, perhaps more so.
Simplicity in investing isn't a biblical principle per se', although the Bible does mention simplicity (2Cor.1:22) and simple living seems to be a biblical theme. Simplicity also seems to be "in style" these days. In his book, "The Simple Life," Thom Ranier wrote,
Americans are rediscovering simple. At least they are aware that they need to rediscover simple. People are hungry for simple because the world has become so complex. The technology revolution has really become an overwhelming information revolution. We have access to more information, more products, more research, and more ideas that at any point in history.
The problem of complexity impacts our personal finances and investing, perhaps as much as or more so than many other areas. Many people I talk to are feeling pretty overwhelmed by financial complexity in general and their particular situation.
I have written on simplicity before as I view complexity is an enemy of retirement stewardship. In this context, I would define simplicity as "accomplishing our investing goals using the fewest possible number of investments and investment accounts, requiring as little time as possible to manage, while appropriately managing risk." Vanguard founder John Bogle, speaking at a financial conference in 1999 said:
To earn the highest returns that are realistically possible, you should invest with simplicity. Rely on the ordinary virtues that intelligent human beings have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance. Call them "character." And in investing, over the long run, character will be rewarded.
When it comes to our finances, especially investing, less is more. We introduce needless complexity when we continually try to find the 'perfect' investment, or combination of investments, to reach our goals.
Complexity can cause you to continually tinker with your portfolio. You will be tempted to constantly fine-tune it since it has so many moving parts. That is probably the thing that gets the most individual investors into trouble – buying and selling too frequently, and often at the wrong times.
Sure, you should consider rebalancing your portfolio on a quarterly or annual basis. But if you are looking at your investment accounts every day (or even several times a day), you will be tempted to start buying and selling. Better to think long-term rather than trying to figure out what the market is going to do tomorrow. You can't forecast the market and neither can anyone else, no matter what they say.
Most people have heard of Warren Buffet, one of the most successful investors of our time. You may think he is a big-time stock trader, but that's not the case. He buys and holds (usually for a long time) stocks of high-quality companies. He once wrote: "We continue to make more money when snoring than when active." His advice to ordinary investors like us: "[Owning] a very low-cost index is going to beat a majority of the amateur-managed money or professionally managed money."
You don't need ten or twenty different stock mutual funds when we can own a few that contain hundreds or even thousands of individual stocks diversified by size and type. So, when it comes to building a portfolio, there is rarely a need for more than 10 or less mutual funds and/or Exchange Traded Funds (ETFs) to implement your investment strategy. Paul Farrell, author of The Lazy Person's Guide to Investing, in an article in MarketWatch, wrote:
Several years ago I started tracking the best portfolios I could find in America, simple portfolios being used by Nobel Prize uwinners, millionaires, conservative portfolio managers, neuroeconomists as well as average Main Street investors. We even found some in books like Investing for Dummies and The Idiot's Guide to Investing We discovered something amazing. They were all saying the exact same thing: All you need is a simple, well-diversified portfolio of just three-to-eleven funds, low-cost, no-load index funds that will create a long-term winner through bull and bear markets. And you do it with no market timing, no active trading and no commissions. "Lazy Portfolios" are that simple. So what about the other thousands of stocks, bonds and mutual funds being hustled by brokers? Forget them!
In my retirement account, I currently own two high quality, low-cost domestic stock ETFs in my retirement portfolio. I also have two international stock ETFs, for a total of four. The remaining five are all different types of fixed income funds, for a total of 8, not including cash.)
There are a lot of places you can look to get ideas for your simple, low cost, easy to manage portfolio ("lazy portfolios" as they're often called). They all have the same themes and principles: low-cost, well-diversified portfolios that can be maintained by you with minimal time and effort.
First is the "Bogleheads" Wiki. The "Bogleheads" are followers of John Bogle and his investing principles, the now famous founder of Vanguard I quoted above. The article is about what they call the "lazy portfolios" – relatively simple, set and forget (except for readjusting/rebalancing every year or so).
Another is the "Simple Money Portfolio" that is in a book called "Simple Money" written by Tim Maurer. (It's a book that I would highly recommend, but investing is just one part of it.) I really like his thinking and the way he developed this model portfolio.
Finally, another one of my favorites is Paul Merriman. He writes for MarketWatch and also has his website. He wrote about what he calls the "ultimate buy and hold portfolio" on MarketWatch, which is very similar to Tim Maurer's "Simple Money Portfolio." Also, here is a link to his recommended Vanguard funds.
The last thing I want to suggest in the spirit of simplicity is automatic investing. If you invest a little every month through payroll deduction or bank transfers, you will be doing what is known as "dollar cost averaging" — investing the same amount automatically on a regular basis. It is very easy to do. And by investing a fixed amount each month, we can buy shares at the least cost possible. We buy more shares when the price is low, and we buy fewer when the price is high. Plus, if we invest automatically, we have a better chance of success.
Slow and steady wins the race! Proverbs 13:11 says, "Wealth gained hastily will dwindle, but whoever gathers little by little will increase it."
Hastiness can take many forms. Perhaps the most familiar ones are the "get rich quick" schemes we all hear about from time to time. One that I seem to see quite a bit lately is something like, "Don't miss the multi-billion dollar opportunity in legalized marijuana!" Notice how these kinds of ads try to snag us with the "fear of missing out" approach? I think I am going to pass on that one.
A good definition of patience in the context of investing might be, "The ability to stay focused on your goals and long-term strategy in spite of all the noise and distractions that will tempt you to do something different."
Patience is a trait that is just as important in life as it is in building a retirement fund. Thoughtful risk management always trumps chasing riches; and as with sports teams, a robust defensive strategy is paramount to a successful offense. But the reality is that most people aren't very patient, certainly not when it comes to investing. That barely kept up with inflation during that time. The S&P 500, on the other hand, returned 9.9% annualized and bonds returned 6.2% annualized.
More recent data from DALBAR's annual Qualitative Analysis of Investor Behavior, for the year 2015, shows the average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. That means if they had invested in a mutual fund or ETF that mirrored the performance of the S&P 500 index instead of their mix of individual stocks or mutual funds, they would have been 3.66% better off.
What is the main contributor to this disparity between individual investor returns and the market in general? It's bad behavior; not morally bad (hopefully), but bad in the sense that many individual investors jump from one recently successful investment to another. Each time they do this, they're buying at a higher price AFTER the security has gone up in price. Then they are disappointed when it falls, and they eventually sell at a lower price. The net result is a loss.
I could argue that buying and selling are not investing at all – at best it's trading; at worst, gambling. And while there is always the exception, most of the research says that stock traders lose more than they win over time. Gamblers always lose, at least in the long run because the house always wins in the end and it's a zero sum game.
Most successful investors know that there is no quick, sure way to meet their goals. It's more about cultivating good investing habits than investment hubris. Good habits will pay off over time. It's not about always actively doing something – that can be a sign of fear or greed. People who have consistently grown their assets have learned to cultivate patience. They don't panic when their account value goes down (as it invariably will). In fact, they may buy more when the price falls and others are selling. They know you can't build a nice nest egg overnight with a quick buy and sell strategy. Patience allows your assets to "grow by themselves."
Our challenge is that Wall Street is continually tempting us by claiming they have special knowledge and insight. (Ever seen an ad for someone's "proprietary investing algorithm"?) Many give their money to them or pay to follow their advice and it cost them dearly.
Patient investors have learned these hard lessons and take a business-like for up to investing. When you regularly buy and patiently hold (but not necessarily forever) low-cost, high-quality funds with proven track records, u just need to wait patiently – to let compounding do its thing. As a general rule, that approach produces better investment results by reducing costs and behavioral errors. There is no need for expensive and complex investment types or strategies to generate investment returns sufficient to grow your assets to give you enough to retire with dignity.
Moderation is closely related to patience because it involves self-control and restraint. A good definition in this context would be: "Using a stable and balanced approach to investing; not given to extremes in investment types or behaviors based on impulse or emotion."
Moderation is viewed as a good thing in the Bible, especially as related to more "worldly" activities such as eating and drinking. One translation of Phil.4:5 reads, "Let your moderation be known to all men. The Lord is at hand." (KJV). Of course, we don't need to worry about moderation in our love and obedience to God.
Moderation is also good when it comes to investing. That's because moderation requires disciple and it avoids extremes in behavior. Saving and investing can be done to different extremes. On the one hand, you can be so focused on saving and investing that hoarding or greed creeps in. That is the "love of money" that Paul speaks of in the Bible (1Tim.6:10). You fear we will lose it, or that you will never have enough.
On the other end of the spectrum are laziness and passivity. You don't act as wise stewards of the resources that God has given you. You are not disciplined and don't plan for the future. You presume on God's provision in spite of our lack of action. You don't exert self-control, so you don't save or invest as we should.
Self-control is one of the most difficult things when it comes to money and investing. You tend to do things on impulse, sometimes based on emotion. Moderation in our finances understands when enough is enough – when you have spent enough, saved enough, and taken enough risk. You have to learn to say "no" to ourselves and also to others who may be trying to lead us in a wrong direction.
It is prudent to seek reasonable investment returns using a diverse and moderate investment allocation suited to meet your investment objectives. The attempt to outperform "the market" often, paradoxically, increases the odds that you will not meet your investment objectives. As Ben Carlson said in his excellent book, "A Wealth of Common Sense," "If your portfolio is able to meet your goals, who cares if you beat the market or not?"
Similarly, having a good strategy and then departing from it can hurt portfolio returns. For example, if you had $100,000 in a diversified portfolio of index mutual funds at the top of the market in 2007 but sold and went to all cash during the panic in September of 2008, you would have had $86,140 at the end of 2010. However, if you held on with white knuckles to your moderate (60/40) mix of stock and bond index funds, you would have had $102,140.
Humility may be the foundation for all the other character traits. Augustine wrote, "If you plan to build a house of virtues, you must first lay deep foundations of humility." Humility could be easily defined as, "Not having a high regard of oneself – one's abilities and intellect, especially in areas of non-expertise and as compared to others."
The problem, of course, is that the natural tendency is toward pride and arrogance, causing us to think too highly of our abilities and intellect, which can be very dangerous when it comes to investing. Proverbs 16:18 says, "Pride goes before destruction, and a haughty spirit before a fall." If we don't humble ourselves, the financial markets eventually will.
Many people, including many investment professionals, believe that their intelligence is the thing that most leads to long-term investment success. The problem is that bright, educated minds tend to become ardent and self-assured. That sets the stage for what psychologists call "expert error." Overconfident, impatient activity can wreak havoc in the long run. After all, lots of dumb things in life are done out of overconfidence and on impulse. Do you baseball fans notice how good batters almost always "take" the first pitch?
Moreover, early, easy success can breed dangerous prideful attitudes. When things are going well, we (or our advisors) look smart and even imagine that we are. But in a bull market, almost everyone is doing well; everyone seems smart, even if they aren't optimally invested. We assume that because we have done well in the past, we will continue to do so in the future.
Such self-congratulatory thinking will eventually be dispelled by Mr. Market. Even if you are doing things "right," the financial markets will take a turn for the worse sooner or later. So, you must approach this with a measure of humility and a degree of flexibility. If you are sure about something – some particular event or outcome – the markets will eventually cause you to question your certainty.
You must be careful not to confuse humility (and a rational understanding of the risks associated with investing) with fear. Most financial behaviorists will tell you that fear (which can lead to panic selling) and greed (which can result in irrational buying) are the greatest enemies of individual investors. Humility and moderation help to keep both of these in check.
Some investors get a little bit of knowledge and then become over-confident about their abilities. They really need to continue to work hard, save, and invest wisely – in other words, stay in their lane. Sometimes the hardest thing is admitting that we aren't as clever as we think (and neither is the financial advisor that is selling a particular narrative about future events, risks that only they fully understand and know how to deal with, and embellishing certain investment opportunities they have uncovered for you that no one else has – their "secret sauce.")
The truth is there are lots of ways we can get the same results with our investments. So a healthy dose of humility does a lot to ensure that we don't get surprised when we think we have it all figured out.
The humble investor focuses primarily on those things that are within his or her control while maintaining a proactive rather than reactive posture concerning things beyond their control. In other words, humility requires one to be aware of their ignorance; future events are not certain or knowable. To think otherwise is highly presumptive and speculative.
Finally, the humble investor seeks out wise counsel and advice. "The way of a fool is right in his own eyes, but a wise man listens to advice" (Prov.12:15). In all areas of life, including our finances, Christians should seek out wise counsel – first from God Himself, secondly from His Word, and third from knowledgeable financial advisers.
I think "knowledgeable financial advisers" don't just include financial and investment "professionals" (although there are some that I closely follow, like John Vogel, Ben Carlson, Ron Blue, Paul Merriam, and Tim Mauer). It could also include those who follow biblical principles and who have become wise through their study and experience; men like Larry Burkett, Dave Ramsey, Randy Alcorn, Matt Bell, Jamie Munson, and Howard Dayton. I also like to read blogs written by those who have "been there, done that" as their perspectives are grounded in everyday life. Check out my Resources page for links to many of these resources.
There you have them: Simplicity, Patience, Moderation, and Humility – four keys to wise investing as part of retirement stewardship. Practice these as you develop and implement your investing strategy, always trusting in God's faithful promises, and your returns should be pretty good – in this life and in the life to come.