From this point forward I’m going to assume that you have chosen to “do it yourself”. If you have chosen to hire someone to do your investing for you, he/she will tell you all about this stuff that we are going to discuss now. And even if they don’t, it probably doesn’t matter because they will be employing these principles for your benefit. One thing to which you should be sensitive when hiring someone to do your investing for you is their understanding of your role as a steward of God’s money. The two of you should be “on the same page” with respect to Biblical stewardship/money management. Having said that, let’s move on to talk about some key principles associated with investing.
RISK AND RETURN. By investing the “surplus” God has provided, we seek to earn a greater return than that offered by our bank/credit union on the savings account where we have our emergency fund stored. You remember that the reason we are willing to accept a low rate of return (low interest rate) on our emergency savings account: safety and accessibility. In order to earn a greater return, we must give up some safety (and in some cases accessibility). We must assume a greater degree of risk, that is, we must expose ourselves to loss (of the money we are investing). There are all kinds of investment opportunities to choose from. Some are more “risky” than others. In other words, some carry with them greater exposure to loss. All of the books, magazines, pamphlets, and brochures you read on this subject will show you a picture something like the one at the top of the page.
There are a whole host of people, companies, organizations, etc. out there competing for our (God’s) investment dollars. One of the lowest risk investment we can make is 4 week US Treasury Bills (commonly referred to as T-bills). These are loans to the US government, the world’s largest economy and one which has never defaulted on its obligations/debts. As the name implies, this is a 4 week loan (other longer term loans are available). At the end of the 4 weeks we get our money back with interest. Guaranteed???? No, not really guaranteed but it’s just about the closest thing to a “sure thing” the world of finance has to offer today. 4 week T-bills are issued by the US government once a week in denominations of $1000. For example, some years ago an issue dated 6-14-07 matured on 7-12-07. It was sold at a price of $99.6465 per $100. It was sold at a discount and at the end of 4 weeks it paid $100. The (annual average) rate of return for this investment (virtually risk free) would have been 4.637%.
In order to attract God’s investment dollars, anyone else would have had to pay (provide a return of) more than 4.637% (assuming, as we economists like to say “all other things being equal”). During this same period, the place where I do my banking was offering six month CDs with a return of 4.7% and sixty month CDs at 5.25% interest. If you have the capability to use the internet, go to “bankrate.com” to see a listing of CD rates from various banks around the country. This website has a lot of really great financial information.
I know what you are thinking. Why does your bank have to pay more to get God’s investment dollars. Isn’t it FDIC insured? What’s the risk? The risk in this example is that the interest rate paid by other banks may increase while I have God’s money invested in a CD at my bank. So why not just cash the CD and invest the money in the bank paying a higher rate? The problem is that if I cash out my CD before it matures, I must pay a penalty. All CDs work that way to prevent investors from moving their money around moment by moment. The management and administrative costs to the bank from such movement would prevent them from making any kind of profit and that’s of course why they are in business (even credit unions must make a profit).
You get the idea. The greater the risk (of loss), the more I have to offer in the way of return to get you to invest God’s surplus with me. The illustration above shows commodity futures to be the highest risk investment. Is there anything more risky than this? Yes, there is. You have no doubt heard the term “venture capital”. Venture capital is provided by people who have more money than they know what to do with so they offer it to those people/companies/organizations who have investment ideas that are so risky it’s not possible to measure the risk. However, if by some miracle, the investment is successful, the return will be enormous (like in the thousands of percent). Obviously God has blessed only a few people with these kinds of surpluses to invest on His behalf. For the rest of us, we will be considering less risky investments and will be exploring these in the next several weeks.