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Show Me in the Scriptures…

October 27, 2009 in Budgeting, Contentment, Debt, Estate Planning, Frugality, Giving, Insurance, Investing, Miscellaneous, Personal Finance Bible Study, Personal Finance Bible Verses, Prosperity, Retirement, Saving, Stewardship, Taxes, Work with 0 Comments

       A reader recently left a comment on my post discussing how much you should have in your emergency fund. Frank said:

Could you please show me in Scripture where it says believers are to have an emergency fund?

Thank you.



       I responded to Frank’s question in the comments, but I think this is an important enough issue to address in its own post.

       Not all personal finance advice can be backed up with a specific quote from Scripture. Does that mean it is bad or unchristian? Not in the least. If the advice follows the pattern of teaching and wisdom in the Bible, it can still be considered good advice for Christians despite the lack of a specific Biblical reference.

       For example, is there a specific Bible verse telling you that you should create a will? No. But it’s still a wise thing to do. Is there a specific Bible verse that tells us to update our résumés? Again, the answer is no, but that doesn’t change the validity of the advice.

       This concept doesn’t apply just to personal finance. Is there a Bible verse telling us to buckle our seat belts? Nope. But does that mean you’re trusting your seat belt more than God if you buckle it? What about looking both ways before you cross the street? Do you lack faith because you do this?

       The problem with applying the “show me in the Scriptures” test is that there is not specific advice for every single situation we will encounter in life. There are guiding principles and values that, along with God’s Holy Spirit, will help us discern the wise choices. But you’re not going to find Bible verses telling you to brush your teeth, stop eating at McDonald’s, or to take advantage of an HSA if you’re eligible.

       Scripture does contain many verses teaching us the importance of wisdom in handling our affairs. Here are a couple examples:

       The simple believes everything, but the prudent gives thought to his steps.

Proverbs 14:15 (WEB)

       The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.

Proverbs 21:5 (WEB)

       Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

Proverbs 21:20 (WEB)

       The prudent sees danger and hides himself, but the simple go on and suffer for it.

Proverbs 22:3 (WEB)



       In fact, the entire book of Proverbs points to the importance of wisdom and its place in the life of those who follow God. But what about all the times Jesus told us not to store up treasures on earth? Or when He taught us not to worry about what we’ll eat and drink and wear?

       Tell me, what did Christ mean when He said do not worry or be anxious? What does it mean to worry or be anxious? Those words mean to be distressed, uneasy, and tormented with care about something (material things in this case). Christ’s solution was for us to “seek first the Kingdom of God”. Instead of being worried about how we’ll meet our material needs, we should be worried about how we’ll meet our spiritual needs – how will we serve God and draw closer to Him.

       You can be worried and anxious about material things whether or not you wisely plan ahead. I can have an emergency fund and still be worried about material things. I can not have one and still be worried about material things. Even if I have an emergency fund, I can stop worrying either because I have that money saved or because I trust in God’s provision. That brings us to the other main teaching of Christ about money.

       When Jesus taught about storing up treasures and serving Money what did He mean? What does it mean to be wealthy or rich or to have treasure? All those words denote an abundance, which means having much more than what is sufficient or needed. Jesus’ warnings about wealth were not to tell us that we should never use money appropriately to meet our needs. Jesus warned us instead of the danger in accumulating more than what we really need. He told us not to become consumed with money and wealth.

       There is a vast difference between being consumed with accumulating an abundance of wealth and planning wisely to have enough to meet our needs. In the same way, there is a huge difference between being occupied with worry and prudently foreseeing needs and dangers and preparing to face those situations. These two teachings that Jesus gave us are so often stretched to mean that we should never save anything at all for the future because that demonstrates a lack of faith. The truth is that Jesus taught us to:

  1. Give God and His Ways priority in our thoughts and lives.

    2.        

  2. Avoid storing up more money than we will need. (That is, not to let becoming rich be our priority in life.)



       Proverbs commends wisdom and many New Testament verses speak to the importance of providing for your own family. We are not taught to make ourselves a burden to others when it is within our power to care for ourselves. Instead, we are taught that if there are any among us who cannot provide for themselves it is our responsibility as fellow Christians to care and provide for those people. Jesus’ teachings combined with the rest of Scripture in no way preclude us from saving for the future, using insurance, or utilizing money in any other wise manner. What is forbidden is making Money our god – giving priority to accumulating more money than we really need instead of serving God.

       The real issue then becomes finding contentment in Christ and determining our true needs. The danger we face is allowing the world to dictate our needs and success (a bigger house, a fancy car, expensive clothes, etc.) instead of learning to live on enough (our daily bread). That is the bigger issue here and the battle all of us Christians face. Once we have submitted to God in our discontentment and covetousness, we will be able to make Money serve us and God’s Kingdom instead of allowing it to be our master. But these are all topics worthy of their own discussion (contentment, defining needs, and avoiding covetousness).

       Please share your thoughts on this topic in the comments. I’m looking forward to hearing from all of you!

How Long is Long Term?

October 16, 2009 in Investing, Retirement with 0 Comments

       Two good questions when we invest money are:

  1. How long until I’m likely to get a positive return?
  2. How long until I’ll get close to the average return?

       Since we can’t predict the future, the easiest way to answer these questions is to look at what happened in the past. Keep in mind we’re looking at the worst case scenarios for each of these questions.

How Are You Invested?

       Your investment returns and risk (volatility) greatly depend on your asset allocation. The more of your portfolio that’s invested in stocks, the higher your risk will be. Higher risk means it will take longer to know for certain you’ll have a positive return over any given time frame. It also means it will take longer to know for certain that you’ll get your required return over any given time frame.

       To answer these questions accurately, we have to look at the mix of stocks and bonds in your portfolio. Assuming you’re invested in a diversified portfolio, the answers to your questions are given below.

How Long Until I’m Likely to Get a Positive Return?

       Put another way, this question is: “What’s the minimum amount of time I need to be invested in a specific portfolio to be fairly certain I won’t get a negative return?”. Here are the answers based on historical investment results since 1927.

  • 0% in Stocks (100% in Bonds): 3 Years
  • 10% in Stocks: 5 Years
  • 20-50% in Stocks: 7 Years
  • 60-80% in Stocks: 10 Years
  • 90-100% in Stocks: 15 Years

       Again, these answers assume you’re using a diversified portfolio as recommended here.


How Long Until I’ll Get Close to the Average Return?

       This question can also be posed as: “How long do I need to be invested so I can be reasonably sure I’ll get a return somewhere close to the historical average?”. The first step to answering this question is to define “close to the historical average”. For the purposes of this article, we’ll define close to the historical average as 75% of the historical average. For example, if the historical average for a given portfolio is 10%, then we’d consider 7.5% as being “close to” that average. We’re looking at the longest historical time period that it took to get close to the average return. So what’s the maximum amount of time we would have to stay invested in order to get close to the average?

  • 0-10% in Stocks: 55 Years
  • 20% in Stocks: 50 Years
  • 30% in Stocks: 45 Years
  • 40% in Stocks: 35 Years
  • 50-100% in Stocks: 30 Years

       Now, it’s important to remember we’re looking at the worst case scenario in both of these analyses. In reality, we’re likely to experience better results than these worst case scenarios. Most of these worst case scenarios occurred during the Great Depression.

       Historically speaking, a 100% Stock portfolio only experienced single digit returns twice over any 30 year period. Both of those single digit periods were during the 30 year periods beginning in 1928 and 1929—the worst times in history to begin investing.

       These time periods are good to keep in mind especially when we’re experiencing difficult times. When it feels like your investments aren’t performing as they should, just remember that it can take many years before you can expect to get a positive or average return in the worst case scenario.

Who Actually Believes in Index Fund Investing and Other Boring Investment Ideas?

September 30, 2009 in Investing with 0 Comments

       Diversification, index funds, low expenses, tax efficiency…they’re all so boring. Isn’t there a better way? Can’t I use research, insight, intuition, and intelligence to beat the market? Who actually believes this boring stuff anyway?

       The guy in the fancy suit on TV doesn’t seem to believe it. The writers of financial publications are constantly telling us which funds are going to be hot this year, or month, or week. There are millions of investment ideas on the Internet which include all kinds of fancy charts and systems and fantastic results. It doesn’t seem like anyone believes in index fund investing and boring ideas like diversification. Everyone seems to have some secret for how they’re going to beat the market, so why shouldn’t you as well?!

Look Who’s Talking

       Before you begin to think that index fund investing is only for schmucks, let’s take a minute to look at who supports these various investment ideals. First, the side of active management, market timing, and various other strategies to “beat the market”:

  • Stock Brokers and Investment Managers – For a fee or commission (or both!), these guys will help you pick the “right” funds or stocks at the “right” time so you get nice returns every single year. They’ll even send you a gift card or free sports tickets every once in a while just to show you how much they appreciate you!

    •        

  • Some Mutual Fund Companies – Sure they charge higher expenses than Vanguard does, but they’re giving you access to the “best” mutual fund managers in the world. With their team of 5,208 researchers, they’re bound to uncover information that will give them the ability to beat the market. And don’t forget about those mutual fund companies with a long family background of managers. All that experience is sure to come in handy.

    •        

  • Market Timing & Stock Picking Newsletters – In the do-it-yourself mood? Just subscribe to one of the many market timing or stock picking newsletters, and Slick Sam will tell you exactly when you should get in and out of which stocks. He might even set you up with a service where his recommendations can be traded automatically in your brokerage account. You don’t even have to do a thing and you’ll make a 389% return in a matter of months!

    •        

  • The Investment and Financial Media – Dow drops 600 points! Stock futures headed down this morning because the commissioner has a cold! Is your portfolio safe? Ah, the financial media. They constantly keep us up-to-date on the latest market news and even give us advice about the next top mutual funds. All we have to do is keep watching their shows or buying their newspapers and magazines and we can reap the benefits of all their knowledge.



       Do you see what I see? Every single one of these players has a vested interest in selling you something—especially in selling it to you again, and again, and again. My father once told me everyone has something to sell, and he’s right. Even the most objective advisor has to get paid somehow. But we have to look carefully at the seller’s motives before we buy—more so when the product is financial advice.

       Now what about the side of index fund investing, diversification, low expenses, and tax efficiency? Let’s look at the supporters of these really boring investment ideas:



       What do you notice in this group? A few less marketing gurus and a few more academics? So whose advice are you going to trust for the future of your retirement? A fast-talking salesman who rushes through the facts, or a research-driven Nobel Laureate whose life has been dedicated to teaching?

I know who I’m going to listen to.

How to Invest for Retirement: A Diversified Investment Portfolio

September 23, 2009 in Investing, Retirement with 12 Comments

       If you’ve figured out how much you should be saving for retirement, your next step is to actually start investing the money. Vanguard offers the widest range of low cost index funds available to individual investors. This calculator will help you invest in a diversified portfolio of index funds.


*Note: Click the ‘Click to Edit’ button to use the calculator with your own numbers.



       The dollar amount you should invest is in column E, which you won’t see unless you scroll over. You can use the full screen view or download it as an Excel spreadsheet.

       Depending on your age and the amount you have to invest, you might not be able to use this calculator. If you’re still young, there’s no problem using a 100% stock portfolio until you’re within 25 years of retirement. (That’s my plan. The 120 – your age rule is just a guideline.) You can force the calculator to use a 100% stock portfolio by entering an age of 20 or lower.

       Otherwise, follow the directions the calculator provides. If you have less than $1,000, you should continue saving in a high-yield savings account (like ING Direct’s Orange Savings Account). Until you have more than $3,000, you should use Vanguard’s STAR Fund (#0056). If you have more than $3,000 but not enough to use this calculator, you should use Vanguard’s Target Retirement Funds. Vanguard’s website can help you determine which target retirement fund would be best for you.

Questions about the Portfolio Allocation

       I’ve compiled some responses to typical questions about the portfolio allocation used in this calculator.

       Why so little in U.S. stocks/so much in international stocks? Most investment advisers recommend a large portion of your portfolio be allocated to U.S. companies. Why is this? As far as I can tell, it’s because they have more faith in American companies. The truth is that American companies only make up about 40% of the total world stock market. If you put 80% or more of the stock portion of your portfolio in American companies, you’re basically putting all your eggs in one basket. By diversifying into foreign countries, you mitigate the risk that any one country’s dilemmas will adversely affect the value of your portfolio. Even though foreign stocks tend to move like U.S. stocks in hard times (like right now), they will move quite differently in the long run. This reduces your volatility (risk) and increases your return. (Though I can’t guarantee that, obviously.)

       Why add value stocks? Historically speaking, value stocks have outperformed growth stocks. In some ways, this makes sense logically. Because you’re buying companies that are “undervalued”, you’re getting them at a discount. Once these stocks return to their true values and continue to grow, you end up with a higher return than if you had bought the stock at a fair or high price. Not all Value stocks actually recover and many do go bankrupt or out of business. However, the ones that do recover come back very strong and more than make up for the losers. This is why you would buy a value index fund – you’ll own thousands of companies, so no one company will have a huge effect on your portfolio.

       The bonds don’t seem very diversified to me. What about long-term bonds, global or foreign bonds, high-yield bonds, or government bonds? The bond portion of a portfolio should be there to serve as a safety net. It’s designed to offset the risk you’re taking on by investing in stocks. You shouldn’t use the bond portion of your portfolio to seek extremely high returns, so that rules out high-yield bonds. Long-term bonds give you slightly higher returns than intermediate-term or short-term bonds, but they do so at much higher risk. It’s actually so much more risk that it doesn’t make sense to invest in long-term bonds for the safer portion of your portfolio. Global/foreign bonds and government bonds are not listed separately because they are included in the bond funds I’ve recommended. The two funds both invest in a mix of U.S. and international bonds and government and corporate bonds.

Other Questions

       If you have more questions about the recommendations or investing at Vanguard, feel free to leave a comment below. I’ll be happy to answer your questions.

How to Invest for Retirement: Asset Allocation

September 16, 2009 in Investing, Retirement, Stewardship with 2 Comments

       If you used the free retirement calculator I created, you should know how much you need to be saving for retirement. Your next step is to actually start investing for retirement. Before you do that though, you’ll want to determine your asset allocation – how your investments will be broken down among stocks and bonds.

       I have a simple rule to help you determine your broad asset allocation. Just take 120 and subtract your age to determine what percentage you should have in stocks. If you’re 25, you’ll want 95% in stocks. If you’re 45, you’d want 75% in stocks. And if you’re 65, you’d want 55% in stocks. Following the 120 minus your age guideline will keep your portfolio aggressive enough to grow while you’re young but safe enough to make it through bad years during retirement.

       Why not the 100 minus your age or the 110 minus your age rules? Because they’ll give you a retirement portfolio that won’t be able to support your withdrawals and keep up with inflation. If you were going to retire at 65, you’d only have 35% in stocks using the 100 minus your age rule (45% with the 110 rule). It’s also not aggressive enough to give you the growth you need while you’re young.

       Using the 120 minus your age rule will help you grow your money while you’re saving and beat inflation while you’re in retirement. But it also gives you a nice balance between risk and reward. Having 55% in stocks at age 65 isn’t too aggressive, but it’s enough to support your withdrawals and beat inflation while helping to protect you from bad markets.

       I’ll be posting an article soon about how to invest in a diversified portfolio through Vanguard, and this 120 minus your age guideline will influence how you invest. If you don’t want to use Vanguard, you can still use this rule in your other accounts. Sign up for free updates if you’re interested in learning how to invest in a diversified, low-cost portfolio!

Faith-Based or Socially Responsible Investing – Delusions of Righteousness

August 7, 2009 in Investing, Stewardship with 14 Comments

       Mike at Oblivious Investor recently discussed some low-cost socially responsible mutual funds. His article prompted me to write about the issue of faith-based or socially responsible investing, which has been on my mind for quite some time now.

       The idea of socially responsible investing has been around for quite some time now, and faith-based investing has seen a lot of growth in the last ten years as well. Investors are showing increasing interest in the concept and many religious teachers are touting the benefits, and alluding to the necessity, of faith-based investing. However, I have found many misconceptions in the arguments of those who support these investing ideas. Personally, I see it as another attempt to pursue righteousness through works and find little Biblical basis for such legalistic views. Here are a few of the reasons proponents give for faith-based and socially responsible investing:

1. When You Invest in a Company, You Help It.

       The idea that you’re helping a company because you’re investing in it is completely flawed. The only time this matters is when a company makes a public offering of its stock. In that case, the money raised from selling the stock does go directly to the company. But if you’re buying the stock on the stock exchange, your money does not go to the company whose stock you’re buying. It goes to the investor who owned the shares you just purchased. From the company’s point of view nothing has really changed except the name on the stock certificate.

       “But if everyone sells a company’s stock its share price will go down. That’ll show them!” It’s true that if a company’s stock price goes down, it will probably affect the company’s ability to borrow money and will impact those employees (mostly officers) who own stock or stock options. However, the idea that you can affect the stock price of a company is absolutely ridiculous. Which brings us to point #2…

2. You Vote with Your Investment Dollars. (Sell the company’s stock, and you’ll show them you don’t support them.)

       Even if all the Christians in the world refused to buy the stock of “sinful” companies, we would see no change in the corporate world at all. If anything, these companies could become even more “sinful” because no Christians would have an ownership voice in how the companies are run. For every Christian that sells a company’s stock, there will be a non-Christian who will buy it up (especially if it is a good value). And we haven’t even looked at the fact that most stock price movements are caused by institutional investors – not individuals with $50,000, $300,000, or even $1,000,000 portfolios. The “big guys” are trading billions of dollars and your investment choices will have little impact on them or the stock market.

3. If You Invest in Companies That Sin, You’re Investing in Sin!

       This claim is absurd for two reasons. First, it relies on the validity of #1 (above). Second, it has no merit even on its own – your investment in a specific company is not causing any more or less sin than if you don’t invest in it. This idea also alludes to the conception that you have control over how your money is spent. This is true only until you spend it – whether on something “holy” or something “sinful”. After that, however, you have no idea how the next person will use it. They may spend it in an even more righteous way than you did (maybe they’ll actually feed the hungry with it…) or they may use it in the most sinful way you can imagine.

       If the proponents of faith-based investing actually followed this argument to its full end, they’d never watch television again. You do more harm by supporting sinful television shows through your viewing habits than you do by investing in sinful companies. First, the television networks raise advertising money because you watch their shows, which leads them to produce more of the same types of shows. And second, these shows can actually affect your conscience and beliefs and tempt you to sin in ways that investing in a specific company cannot. I’m not saying you should seek out sinful business to invest in. But if your portfolio holds 1.3% of Exxon because you invest in index funds, you’re not going to be more likely to sin because of it. But if you pollute your mind with shows that do not glorify God, you’re giving Satan a much easier way to tempt you.

4. Faith-based or Socially Responsible Investing Is Good Stewardship of Your (God’s) Money.

       Take a moment to consider the prudence of investing in faith-based mutual funds where you pay 5% up front as a “sales load” (commission to broker) plus annual expenses of 1.45%. The fees for righteous investing are outrageous, and there’s no way I can consider it good stewardship to spend that extra money on something that has negligible benefits for actually improving the world. And don’t think that you’ll get better stock selection because you’re using these highly paid professionals “with a conscience”. Take a look at the actual holdings of some of these faith-based mutual funds and you’ll find some of the same companies you would in an index fund. For example, the MMA Praxis Value Index Fund holds Time Warner, which owns HBO, which in turn shows adult entertainment. I’m sure there are many examples from a variety of faith-based funds, but this one highlights an important reason you shouldn’t get so focused on this idea. The corporate world is so convoluted and full of subsidiaries of subsidiaries that it’s difficult to really know what a company is involved in.

       It doesn’t get much better if you decide you’re going to buy individual stocks you’ve researched for their righteous actions (or at least non-sinful actions). First, you’re going to need to buy “round lots” (multiples of 100 shares) to avoid paying an artificially inflated price. Then, you’ll need to buy at least 30 different stocks in different sectors to create your diversified portfolio. Also, don’t forget your trade commissions – at least $7 per trade, probably more if you don’t shop around. And we’re just talking about U.S. stocks…the transaction costs for international companies can be much more, not to mention the difficulty in obtaining accurate research about their business practices.

       The only socially responsible fund that comes close to having the same low fees as an index fund is Vanguard’s FTSE Social Index at an expense ratio of 0.31%. But it’s still likely that some of the companies in that fund will violate your personal morals, so you’re still back where you started.

5. Can You Own Those Companies with a Clean Conscience?

       This is the only valid argument on the side of faith-based or socially responsible investing. If the Holy Spirit convicts you about owning specific companies, then there is no reason you should own those companies. But do not try to further justify your reasons by using the claims above – they are illogical and have no factual support. And do not place the burden on other Christians by preaching that they should do the same. God has provided no clear teaching on the matter in the Bible, and adding legalistic rules to faith in Jesus does not glorify Him at all. If you still feel compelled to invest according to these “faith principles”, that is fine. But do not condemn or judge others because they do not follow your opinions in such trivial matters.

       The Holy Spirit has revealed nothing to me about investing in index funds as being evil. If anything, we’d be better off spending our time focusing on showing God’s love and sharing the news about Jesus rather than worrying about how our money is invested (especially when it doesn’t really affect the world). The whole concept of faith-based investing reminds me of when Jesus blasted the Pharisees for straining out a gnat but swallowing a camel. We are still finding ways to emulate the Pharisees today – using legalistic rules to justify ourselves as righteous while neglecting the things God really cares about. We worry about investing in sinful companies, but we’re fine with planing for an early retirement or a second home when people (including Christians) are starving and homeless. Which do you think God cares more about?

Where Does Your Righteousness Come From?

       Just as Paul asked the Galatians to remember how they became righteous, I ask those who preach faith-based investing the same question. Did your investing habits condemn you or save you from your sin? Do you claim your righteousness and holiness based on how you choose to invest your money? Let’s not forget that we place our faith in Jesus Christ – knowing that it is by grace we have been saved through Christ’s death.

       Nowhere does Christ preach such a legalistic faith as the one faith-based investors would like us to follow. What did He teach us? To love God and to love each other. His teaching focused not on the possible actions of others, but on our own actions and our own thoughts. Which is the more loving act? To invest in companies that will make us feel better about getting rich, or to give generously to those in need while remembering the gift of Jesus?

       If you want to see real change in the world that will glorify God, then do the things you support. Give your time and money to causes that promote your values. And instead of relying on your investment dollars to change people, spread the Gospel. It’s the only force that will effect any lasting and truly good change in the world.

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