Diversification strategy from the Bible

What the Bible says about diversification...One of the common tenants of safe and prudent investing has been to keep your investments properly diversified. If you think about it a little bit, it is really common sense if you are trying to minimize risk. Why have all your eggs in one basket, when you can have them spread around into 7-8 baskets. That way if one of them falls, you can still make some scrambled eggs for breakfast! I get such a kick out of it when I find scriptures that are still amazingly relevant to our lives today that were written thousands of years ago. Hurray for the timelessness of the Bible!

Diversification scripture

Solomon actually left us with some investment advice about proper diversification in Ecclesiastes 11:2

“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”

So, this is great that the Bible has specific advice about diversifying, but it gets better… I just finished reading an article by Robert Katz in which he was talking about this same verse of scripture mentioned above. Robert goes on to talk about a recent study that was done comparing a variety of asset allocation (or diversification) strategies over the last 37 years to see how they compare…

Dr. Israelsen had decided to study various asset allocations, such as a one-asset portfolio (all cash), two-asset portfolios (cash and bonds), three-asset portfolios (cash,bonds and large U.S. stocks), etc., up to seven-asset class portfolios. He also studied traditional portfolio mixes, such as 60 percent stocks and 40 percent bonds, or 40 percent stocks and 60 percent bonds. He studied a total of ten possible portfolio combinations. He then compiled statistical data on each portfolio for the last thirty-seven years to see which would produce the highest return on your investments with the lowest amount of risk. Here is the truly amazing part that was like an arrow of revelation hitting me as I read his study. The absolute best portfolio allocation, providing an average yield of 11.25% over thirty-seven years with the lowest standard deviations for risk, was the portfolio that included all seven assets. In fact, with this portfolio, the chance of losing 10 percent or more of the value of your portfolio in any one year was zero.

I love when Science “discovers” something that has been in the Bible for thousands of years. ;)

The seven asset classes

Now Solomon didn’t specify which asset classes to invest in, so we have to take care of that part ourselves. Robert has seven that he recommends and I assume that he talks about this in his book The Solomon Portfolio but his recommended seven asset classes are…

  1. Large-cap U.S. stocks
  2. Small-cap U.S. stocks
  3. Non-U.S.stocks
  4. Commodities
  5. Real Estate Investment Trusts (REITs)
  6. Intermediate bonds
  7. Cash

According to Robert all seven investments should be made and maintained in equal portions.

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  1. Bob:

    Good advice! But then ANY advice from the Bible is good. Personally, I think Solomon should’ve been awarded the Nobel prize that was given to Harry Markowitz — and Solomon is a LOT easier to understand. ;-)

    I’ve examined this in I did a post last year.

  2. I’ve been looking for that verse for a really long time. I remembered the phrase but could not find it.

    The reason it stuck in my head is these days, so many families in southeast Michigan can look at each of their seven or eight divisions of wealth — and find that all of them have fallen in value. : (

  3. Nice found.
    It’s good to know that we can really rely on the Bible for some research and study.

  4. Just a quick note to inform you that this article was included in the May edition of ‘Christian Family Information Exchange’-Blog Carnival. http://olinepublishing.blogspot.com/2009/05/christian-family-information-exchange.html Thank you and God bless!

  5. My favorite part of the article is “I love when Science “discovers” something that has been in the Bible for thousands of years.” Had me smiling from ear to ear. There’s plenty of solid financial advice in the Bible, it’s a shame a lot of people think of it as “out of touch”!

  6. I agree that the bible has a lot of wisdom. But I disagree with how you applied it.

    Your seven asset classes are diversification, but its diversification that is just as dangerous as if you invested in only one of those assets. Why? because what you have there simply wont protect you from a market crash. I know that financial planners will tell you that nothing can protect you from that, but they are completely wrong. Assuming the american economy went to pot, which is obviously what you would be hedging against by diversifying. Everything your investing in there would be taken out except for the commodities and possibly the foreign stocks. But your stocks would only survive assuming you invested in Chinese stocks or some other country that would directly benefit from a bad american economy (so not ANY Western European Nation. because their currencies are pegged to the dollar). Further, unless you invested in a few specific commodities, their prices would only rise in relation to the dollar, but might actually fall in prices relative to other economies. Unless of course you invested in a commodity that would be driven up BECAUSE of a market crash. And there are only 3 potential candidates guaranteed for such a position. Gold and Silver, because they are investments people turn to in times of widespread panic. And oil, because if america nosedived the rest of the world would probably stop trading in dollars for their oil. The only drawback is that there would probably be several competing currencies which might possibly drive the price of oil down a bit (not for America, but for those individual currencies. If the dollar ceases to be the currency in which the world trades oil, our oil prices will likely go above $10/barrel, assuming we dont go into hyperinflation, because then it would just grow to some astronomically rediculous number)

    Here would be true diversification for this economic climate

    1. Whatever your normal investments for a good economy would be. Because there is no guarantee that a crash will come in the near future (its about as likely as the sky being blue tomorrow, but its not 100% certain) Could be anything from real estate to stocks, but definitly NOT government bonds because even in the best of situations those will be going down until the world begins to trust America again. at which point you should buy. A good sign for that would be America eliminating the Federal Deficit and beginning to seriously pay down thei national debt. If the Tea Partiers win over teh senate in 2012 and someone like Donald Trump or Mitt Romney wins the presidency it might be a very good idea to buy bonds. But it would still be a big

    gamble.

    2. Gold, Silver or Oil. You say, but every “professional” is advising against that right now and thinks

    Gold is in a bubble. Yeah, thats because neither them, nor their advertisers which are mostly mutual funds,

    can make money off of you if you invest in Gold because the best way to buy that is directly from the

    seller, without a broker or middle man (like them and their investors). Also, you will be the one

    physically holding your investment and deciding when you sell, whereas, with mutual funds, THEY hold them

    FOR you and THEY decide when you sell because they are the “professionals” (i might add the same

    professionals that were advising you to invest in Bear Stearns until ONE DAY BEFORE IT CRASHED. and not

    because they didnt know it was gonna crash. Because they DID know and they had to give their advertisers

    CEOs time to get their personal investments OUT of the parts of the market that would crash before it

    crashed (which is done by making the public at large believe its still a good investment, ie, through

    telling you that it will keep going up when they KNOW it will crash.((talk about insider trading!!))) If

    your gonna invest in Gold Oil or Silver youd invest, preferably in Silver or Oil. Because Gold is a panic

    investment (it ONLY goes up in troubling times) and is thus more volatile especially considering the

    possibility of the Government making Gold ownership illegal again. Its also has virtually no real life

    applications so 95% of the gold ever mined is still in circulation. Its also much more expensive than

    silver, and because one ounce of it is more expensive, your potential for exponential increases in your

    wealth with it is lower because you would own less base units of it. However, its still a better investment

    RIGHT NOW than ANY stock. Silver is also a panic investment, sort of, but it actually has real world

    application, which means that even in a good market its price will generally rise, unless demand for it gets

    so high that production increases, in which case its price would decrease. Its also great because it cannot

    be directly mined for, but must be gotten as a side product of other mining operations. (if you invest id

    recommend waiting until it resumes its historically consistent price of 1/16th the price of gold, which

    would be, at current market price, about $80 an ounce (over 3 times the current market value). It may go

    even higher assuming the american economy tanks. But if the economy doesnt tank its almost a shoe in to go

    up to at least 80. and it wont fall because the demand for it in technological applications is only

    increasing, and only 5% of the silver ever mined in the world is still unused. There are also no mines

    producing it in LARGE quantities right now and it would take DECADES to scale up production to the point

    where the price would begin dropping. Oil will obviously always go up as long as OPEC is around. Finally,

    investing in commodities does not mean investing in paper stocks of commodities, as are sold by the same

    brokers that give you, nor does it mean investing in those collectors edition gold and silver coins you see

    on telivision that are being sold “only for a limited time” because those only have value to a collector,

    and have no value as a hard core COMMODITY. What you want to buy is bullion. If it doesnt have the purity

    and weight marked on to it. Dont buy it. If you dont know the going price for gold. Dont buy it. There are

    a lot of charlatans out there selling junk gold and junk silver.

    3. Chinese Stocks – Regardless of what happens to america, or the world economy, china will keep rising, at

    least for now. Its the only country that can claim that position. In fact, the only thing that could slow

    its growth significantly enough to cause a risk to your investments would be if America put tarrifs on

    China, which will only happen if someone like Donald Trump or Mitt Romney get elected. So if they do. Get

    out, immediatly. But assuming Obama stays in office, your golden. Even so. You would have to know WHAT you

    are investing in, because individual stocks and businesses will still fluctuate in the chinese market as

    they do in any market. A mainland based business might be an even better inevstment than a Hong Kong

    investment because the financial/political climate there could easily change the more Mainland China begins

    to catch up with it. India would be an ok foreign investment too. But not as solid as China. Some people

    may say that your hurting the american economy by investing in China, but its not your fault. Its the

    Governments fault for enacting policies that make it dangerous to invest in America. You are just being

    smart by protecting yourself. Yes, you should be a patriot. But not at the risk of losing all your money

    because of someone elses corruption. Id say, invest in China, and go to Tea Party Protests, youll definitly

    offset your damage to the american economy by doing your part to help reverse the things that are causing

    the poor investment atmoshpere here in America.

    4. You dont have to invest in a foregn country to protect yourself though. Invest in stocks of American

    companies whose price wont be determined by the American Economy at large because it is too global, or

    because it does most of its production overseas AND has a significant portion of its consumer base OUTSIDE

    of america, but not necessarily in one other specific nation. Good examples are Google and Coca Cola.

    5. Real estate that gives you passive income from rent. It would have to be in a neighborhood where there

    will always be more jobs, even in a bad economy, because the demand for your rent then would never go down,

    and you could drive the price up more than normal because people NEED to live their for their job. In

    America, a great example would be an Oil town. A better example would be owning property in India or Brazil

    though that would be difficult due to the distance and you would probably have to speak the language (except

    in India where the business language is English)

    6. Foreign Currencies – The Yuon is a great investment right now. There are also several newly created

    currencies that the Russians and a few other countries are using to buy oil instead of the dollar. Very

    good investment, the only problem is getting a hold of some, which is a little more difficult than

    exchanging your dollars for euros (euros are an even worse investment than dollars by the way, because a.

    its pegged to the dollar, and b. it could fail all on its own, even without another American crash. The

    Bancor, if it ever gets printed, could potentially be good. But it could potentially be a terrible

    investment as well. Depends on if it is minted as a replacement to the dollar. Or if it comes into print

    before a hypothetical dollar crash (when its printed, look at what they peg it to to know if it will be good

    or bad) Another great investment right now that is virtually unknown are the alternative currencies

    sprining up all over the country, like the Berkshare for example. A great investment because its so EASY to

    know when to get out; If the dollar continues dropping and other nations continue in their course of moving

    away from being dominated by our currency then stay in. If foreign investors and mega rich businessmen

    start investing in our economy again. Sell your alternative currencies and buy, not the dollar (though that

    would be ok) but shares of those new job producing companies. Ill make it even eaiser. If the rich people

    you know stop quoting Ayn Rand and reading from Atlas Shrugged, its time to reinvest in the american

    economy, because that is what they will be doing. (if you dont understand why Atlas Shrugged could have such

    an effect on the economy, look it up.) You could also just wait until/if the government repeals all of

    their business regulations and lowers the corporate tax rate and repeals obama care, and begins restricting

    unions.(at which point, the John Galts of the world would begin investing again instead of attending

    seminars on objectivism anyways) Because THOSE regulations and policies are the real reasons there are no

    businessmen here, and consequently no jobs. Its not the illegal immigrants fault and its not Chinas fault.

    its the politicians fault, on both sides of the aisle. do you realize that we have the highest corporate

    tax rate in the world, and that there are more business regulations that restrict companies here than

    ANYWHERE ELSE. Even communist China has less regulations on business. That seriously hurts the bottom

    line, and its why there are no jobs. Not because of a “bad economy”

    7. Your mortgage. Possibly the best investment. Lots of people dont realize. the interest payments they

    are making over their lifetimes because of not paying off their mortgages (and other debt too) are by FAR

    surpassing any gains they are making in the stock market. ESPECIALLY if they invest heavily in mutual

    funds, because the more you invest in mutual funds, the closer to the stock market average your own gains

    will be, which barely beats out inflation. not to mention making enough to offset the losses from the

    interest on your various types of debt. You would be better off avoiding as much as possible investing at

    all, and just pay off your debt. I know lots of people that were always constantly telling me about how

    diversified they were before the crash. They completely ignored the things i would say, and even told me i

    was an idiot. But I turned out to be right and now those people, with all their mutual funds and large

    retirement plans (and large amounts of consumer debt and huge mortgages) have foreclosed on their houses and

    lost everything in the stock market, including their retirement. Get out of debt. its a fantastic

    investment.

    The above investments are good because they are not tied to each other like small and large cap stocks would

    be (if the market crashes, they are both sunk!). You will notice that most investments that “professionals”

    recommend are investments that are tied to each other because in order to invest in them you would need to

    go through a broker. who would that broker be? THEM OR THEIR ADVERTISERS. they dont want to make YOU

    money. They want you to make THEM money. Also, each of these investments is pretty much guaranteed to stay

    up unless certain specific events happen, and in those cases you could get out before you lost money

    (assuming your paying even a remote amount of attention to current events). However, the stock market as a

    whole can be completely unpredictable. The more diversified you are, the harder it is to know when to get

    out. but thats part of the problem. Most people who diversify dont ever even PLAN on getting out. Their

    idea is to ride out the wave. But that doesnt work. Because if you stay in for the long run, your really

    taking your money to the casino, hoping that you will retire and die before the next market crash, which is

    very unlikely. The best reason that these investments are great is that you can diminish, or even avoid

    taxes with them. Which take out a HUGE chunk of your ROI. Investing in foreign countries, if done right,

    can be done by legally and completely avoiding the american tax system altogether, which is great because

    america is the highest taxed nation in the world. Contrast that to investing the way that most

    “professionals” would advise, investing as an amatuer in the stock market by using the money in your 401k

    plan to invest will make it so that when you pull that money out of your investment, you will pay income tax

    rates on your gains, instead of the tax rates that professionals deal with. In short, the government screws

    you for your ignorance.

    I believe that diversification is really just a hedge against fear and ignorance. And the bible says that

    if you fear, you will cause what you fear to happen. Fear is the antithesis of faith and should not be the

    basis for any action, especially something so tied to your personal welfare. However, i believe that

    diversification is important. But i believe Solomon was talking about a different type of diversification

    than we typically imagine in our modern day. In his day, the only investment was commodities, land, and

    animals. There were no other investments. And he is obvioulsy saying that you should keep those

    investments, lets say in this case, all of solomons gold. In seven different places, because thieves could

    break in and steal ALL your gold if its in the same place. I would recommend the same thing. Lets say you

    invest in gold, thats a great example. Put some in a hidden safe in your house, some in a public storage

    facility, and some in a foreign storage facility.

    Ultimately, the best investment is your own knowledge. The reason that I do so well in my investments is

    because i dont HAVE to listen to “professionals” who advise me on investments, but then make all their money

    through a PAYCHECK. I invest based on facts. I can almost certainly predict what is going to happen to my

    investments, at least, with enough accuracy that i know when to invest, and when to get out or shift into

    something else. If your financial advisor cant tell you WHY your particular investment will be going up in

    the future, what price you can expect to see it rise to, and when and, most importantly, how to exit your

    investment (and the WHY for doing all of those things in that particular way) then hes just telling you

    whatever his manager told him to tell you, and its probably advice you should NOT be following, because it

    isnt geared to make you money, but to make them money, which frequently means you LOSING money.

    Dont know how to increase your own knowledge? Well i dont want to advertise for anyone so ill just say look

    for people who advocate increasing your financial knowledge. Those people have a vested interest in telling

    you the truth and helping you make more money because if they dont increase your financial knowledge, youll

    stop buying their books. (whereas financial planners can just blame it all on the stock market or some other

    external factor instead of taking responsibility for their mistakes, also, anyone lying about financial

    things stands at a much greater risk the more his customers know about financial things and stand at a

    lesser risk when all they know is the misinformation they have been fed by the government/banking/media

    complex, because no one will know enough to call them on their BS.)

    Be smart, learn the principles that guide world economics and business instead of touting the popular line,

    and dont hand your money over to a stranger. Take care of it yourself. There is no magic pill to being

    rich. There is only your own personal financial knowledge or lack thereof.

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