Do you remember the first time you invested in the stock market? I was first introduced to the exciting world of investing when I was in my twenties. I can still remember watching television in the fall of 2008 when the markets were taking a nosedive. I remember hearing famed investor Warren Buffett talking about how though the future looked grim, it was actually a great time to be buying. He talked about how when everyone is selling, you have the best opportunity to buy quality stocks on sale.
I only had a little extra money at the time, but decided to take a chance and start investing based on Buffett’s advice. Though my understanding of the financial markets were very basic, I purchased some Apple stock, primarily because I thought it was a cool company and their share price had gone down about 40% in a week. I accurately guessed that Apple’s stock would come back into favor, so posted a great return. Have you ever heard a story like this and kicked yourself for not investing when you had the chance? If so, don’t beat yourself up quite yet.
The thing about “big win” stories are that people never share about the times that they lose. I wish my stock picking had always resulted in big returns, but the truth is that I vastly underperformed the market over the next 10 years. Some of my many errors included consistently try to avoid market corrections, investing in the next “hot buy”, or being heavily invested in an underperforming segment. Though the markets have taken a bit of a dip over the last month, it is still up over 350% from its low point of $6,547.05 on March 9, 2009.
Though the Bible was never intended to be an investment guide, there are some timeless truths we can use to invest with greater wisdom. Here are three Biblical Truths About Investing:
Ecclesiastes 11:2 – But divide your investments among many places, for you do not know what risks might lie ahead.
As I consider my Apple story, a person might note that Apple has gone up dramatically more than the overall market the last 10 years. That is a very shrewd observation, but I didn’t mention earlier that I had also invested in Sears around the same time. Why do I share this now? Well, one of those investments performed great while the other has vastly underperformed the market. Fortunately, I was introduced to diversifying and was able to avoid the potential risk of single stock investing.
So what does diversifying mean? As Ecclesiastes 11:2 points out, it’s all about spreading risk over many investments. Instead of focusing on picking specific companies, consider purchasing mutual funds (which are simply a combination of many companies’ stock). My personal preference is to use Index mutual funds because their strategy is simply to mirror the weighted average for various segments of the market. Because they are simply purchasing a small percentage of each company in the segment, the management fees are dramatically lower than actively managed funds.
An example of index investing is purchasing an S&P 500 Index Fund because it mirrors the stocks of 500 large-cap U.S. companies. It is commonly used to show the overall performance of the market because it captures 80 percent of the market cap of the stock market. This index has historically produced long term returns of 7-10%, with an average rate of return of 9.49% for the last 10 years.[i] Diversifying can go much deeper though than simply buying one index. With a mix of Small-Cap, Medium-Cap, Large-Cap, & International funds, you could literally own thousands of companies in your portfolio.
2. Don’t Try to Time the Market
Ecclesiastes 11:4 – Whoever watches the wind will not plant; whoever looks at the clouds will not reap.
Like many people, there has been a part of me that felt like the market would go down in the near future. Call it instinct or common sense, but after 8 years of positive returns, I just knew the market would eventually go down. The problem with this idea is that I have had this feeling for the last 3 years. In 2017 alone, the market was up around 25%. When people try to time the market, they end up missing the rebounds that come shortly after the drop.
I recently read about an interesting phenomenon. Did you know that the S&P 500 index has experienced an average intra-year decline of 14.2% from 1980 -2015? Despite those drops, the US market ended up with a positive annual return in 27 of those 35 years.[ii] When the doomsday forecasters start predicting market corrections and pullbacks, they are probably correct. That being said, by staying in the market and continuing to buy when sentiment is low, you’ll be able to reap great returns over the long haul. The people who try to get in and out by timing the market are almost always the ones who lose.
3. Don’t fall for forecasts and financial media noise
Ecclesiastes 8:7 – Since no one knows the future, who can tell someone else what is to come?
Some investors are praised for being the best stock pickers in the business. One afternoon investment show in particular includes a host who will yell and scream about which companies are positioned well or should be avoided. As entertaining as these shows may be, their track records are brutal. The unfortunate reality about these programs are that they ultimately have no idea how the market will respond.
In fact, the financial institutions pay big money to convince consumers that they can beat the index. The truth is that according to a 2017 report, 92% of actively managed large-cap funds had lower returns than the S&P 500 index (over a 15 year period). What about small and medium cap funds? They, after all, would require more research, right. Well, small caps underperformed 93% of the time and medium cap underperformed 95% of the time.[iii]
Though many companies truly believe they offer a solution that will ultimately outperform the index, my personal strategy has been to stop trying. Based on all the information I’ve seen, I am convinced that by investing with lower fees and simply trying to replicate the overall market’s return, I will be best positioned to meet my long term investing goals.
These 3 truths have become very influential in the way I invest. That being said, there are tons of moving parts in understanding how to approach investing. If you have other topics you’d like to learn about, or simply want to connect with someone on the stewardship team, send us an email at [email protected]
Written by Financial Stewardship Pastor Ryan Kaczmarek.
[ii] Robbins, T. (2017). Unshakeable. New York: Simon & Schuster