This investing principle/rule is an absolute. Never violate it.
NEVER PUT ALL YOUR EGGS IN …………………….. WHAT?
You young people maybe have never heard this expression but all you old people know it. Never put all your eggs in one basket. That is, don’t invest all of God’s surplus He has entrusted to you in one place. But, you say, what if I had taken every cent I could scrape together and even borrowed more to purchased IBM stock way back when, or Microsoft stock at just the right time? Or what if I had bought that piece of property on the East side years ago? It would be worth a fortune today. I would (God would) be rich. On the other hand, what if you had purchased Enron stock at just the right time? You would have lost everything. You see the dilemma. Remember the definition of management, “The wise use of resources (money in this case) to accomplish goals and objectives.”?
You see why it isn’t wise to invest in just one opportunity. We want to spread our risk of loss among several investments. All investment experts will tell you this and most would agree that we shouldn’t put more than about five percent of God’s total to be invested in any one opportunity (I might say no more than 10% but I’m not an “expert”). Furthermore, the Bible speaks directly to this issue in Ecc 11:2 where it says “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” NASB
Another important investing issue is one the experts will tell you is possibly the most important decision to make. That is, how much of God’s surplus you should invest by lending versus how much to invest by ownership. They call this decision “asset allocation”. That is, how much should you invest in bonds versus stocks. The answer to this question is fairly straight forward in a general sense but I can’t tell you specifically what yours should be. The answer depends on several factors.
- Time Frame. How old are you? The more years you have to let your investment take advantage of that wonderful phenomenon called compounding the more aggressive you can be in choosing opportunities with higher degrees of risk. Remember, risky opportunities must promise greater returns to attract your (God’s) investment dollars and if (perish the thought) you are unfortunate enough to experience a loss, you have time to recover. As the old saying goes, “Time heals all investment wounds”. If you are 20 years old and just getting started investing for that time when you will be unable to work (I’m not calling that retirement) then you will be inclined to invest in more stocks, less bonds.
- Size of Surplus. How much can you afford to lose? The more you can afford to lose, the more risk you can take.
- Paranoia. Maybe this isn’t quite the right word but if it makes you nervous to invest in risky opportunities and risky investments make it difficult for you to sleep at night, then you should invest in less risky opportunities (more bonds, less stocks). Maybe temperament is a better term than paranoia or aversion to risk or fear.
- Need. Most experts will suggest that the greater the investment goal/need (retirement, college, new car, house, etc) the more you should invest in opportunities promising high returns. This logic has always kind of bothered me because of the relationship between risk and return. That is, the greater the promise of high return the greater the risk (of LOSS).
You are no doubt beginning to see some inter-relationships among these different factors. That’s what makes the asset allocations decision a little tricky. As you do more reading on investing, you will discover that many (most?) authors have opinions about asset allocation. However, they will probably not be radically different from one another.