Investing 101 -- A Primer
- Howard Dayton <i>Baptist Press</i>
- 2004 6 Jun
There are many reasons why people invest. Some simply invest for the sake of making money and, while it may sound strange, this is the wrong motivation. Others invest to secure their retirement or to accumulate funds as quickly as possible for a specific purpose such as buying a home, providing an inheritance for their families or paying for a college education.
Crown Financial Ministries is not qualified or licensed to give professional investment advice, but we certainly can present investment information based on principles of God's Word that apply to both the novice and seasoned investor.
Allowing material assets to erode through bad management is not good stewardship. But if you simply multiply and store assets without a purpose, you'll be guilty of hoarding, which is condemned by Jesus in Luke 12:16-21.
Investing itself is not unscriptural. In fact, Solomon, in all of his wisdom, gives an excellent investment plan to follow: "Give a portion to seven or even to eight, for you don't know what disaster may happen on earth" (Ecclesiastes 11:2). Solomon found that the way to have peace of mind in regard to investing for the future was to diversify and turn the worry over to God. However, few people are knowledgeable enough to invest wisely without some basic suggestions of what to do and how to do it.
Questions to Ask Oneself
No one should invest without having a purpose. So, formulate some investment goals -- retirement, education, tax shelter, foreseeable relocation, moving expenses and so on. Then ask yourself some specific questions.
Why are you investing? What will you do with the money? How much will you need, and how much are you willing to risk, to accomplish your goals? How long are you willing to wait in order to accomplish your goals? Can you invest without jeopardizing the family income? Is investing included in your family budget? Do not allocate money for investing if your family budget doesn't allow for investing. Instead, wait until the budget can sustain an investment allocation.
Consider whether you can afford to lose your initial investment if the market or your particular investment choice reverses itself and begins to drop in value. How long can you afford to wait if your investment does begin to drop in value?
These important factors must be considered and evaluated before any of your money is allocated to investment.
In the concoction of the thousands of opportunities for people to invest their money, there are a few basic investment rules that both experienced investors and beginners should follow:
• Avoid surety. Surety means taking on an obligation to pay without having a guaranteed way to make the payments. The most common form of surety is cosigning a loan for another person, but it includes any form of borrowing in which an unconditional guarantee to pay is committed.
• Evaluate risk and return. If you cannot afford to lose it, don't invest it.
• Never encumber all of your assets. Keep at least half of your investment debt-free.
• Be patient. Most get-rich-quick schemes rely on greed and quick decisions. Let your money work for you, and don't expect overnight success.
• Diversify. Follow Solomon's words of wisdom and don't put all your eggs in one basket.
You're probably a beginner investor, that's why you're reading this. If so, the following suggestions may help you make wise investment decisions:
• The investment should be simple to understand and easy to follow.
• You need to be able to handle the investment entirely on your own and it should take very little time to manage.
• It should not cause you stress, worry or anxiety.
• It must not change your lifestyle or cause family disharmony or stress.
• It must have liquidity (getting your money back in case of an emergency).
• You should be able to increase your investment without administrative or managerial hardship.
• Never risk what you cannot afford to lose.
The Risk Factor
When speaking of risk in the financial sense, the term refers to potential loss. Risks might be numerous and significant, or they could be few and negligible. When beginner investors consider investment options, they need to understand the sources of risk so they can minimize the risk factors:
• Interest rate risk -- changes in interest rates can affect bond prices and bond returns.
• Purchasing power risk -- inflation diminishes your purchasing power, so the rate of inflation should be considered when investing.
• Market risk -- the rise and drop of the general stock market can affect specific investments.
• Marketability risk -- the ease with which you're able to sell your investment.
• Business risk -- the risk of default is increased if issuers have large financial and overhead commitments.
• Reinvestment risk -- the ability to reinvest your principal and dividend receipts at a desirable rate.
• Price risk -- this risk is based on current interest rates and the rate of inflation.
Until they become familiar with the investing process, beginning investors should invest in conservative options before expanding into more active or higher risk investments. There are four conservative areas that beginning investors should consider:
• Certificates of deposit (CDs). CDs guarantee a specific and stated rate of return at maturity. The longer the maturity time, the higher the rate of interest return.
• Individual Retirement Accounts (IRA). Contributing to an IRA as early in the year as possible can mean thousands of dollars of additional interest earned over the life of the account.
• Low to medium risk growth mutual funds. Disciplined contributions to growth mutual funds over the years can reap large dividends. Even if the contribution to a growth mutual fund is the minimum allowable, if it is consistently and regularly invested, it will provide a significant return.
• U.S. savings bonds. U.S. Savings bonds are safe investments with guaranteed rates of return.
Do Your Homework
Every investor must begin somewhere. But before you allocate money to any of the investment options, first establish your goals, understand the basic investment rules and realize that investing is not intended to be an overnight get-rich-quick success. Those who want to invest should recognize that investing is a long-term undertaking that should not affect the daily family routine and must not cause the family stress or discord.
God's number one qualification for investing is always centered on our attitudes. Money can be used for the comfort and convenience of our families, or used to provide the needs of others. It can be used to spread the Gospel, or it can be used for destructive purposes. Or, as in the case of the rich young ruler recorded in Matthew 19:16-30, money can be an object of devotion and idolatry. Love or misuse of money has ruined lives, separated families and shattered friendships.
Christians must assess why they want to invest and how the surplus from the investments will be used in the light of God's principles. God is not opposed to our prosperity, but He hates evil attitudes that often accompany prosperity. These attitudes include greed, covetousness and pride.
So, since ultimately attitude will determine how an investment surplus is used, it is vital to discover what attitudes you have -- and what attitudes God wants you to have.
Howard Dayton is CEO of Crown Financial Ministries. Dayton and the late Larry Burkett joined forces in 2000 when Crown Ministries led by Dayton merged with Christian Financial Concepts led by Burkett. The new organization became Crown Financial Ministries, on the Web at www.crown.org.
© 2004 Baptist Press. Used with permission. All rights reserved.