Ensure that you Understand the Investment
By: Tom Copland
Over the past 28 years, I have had the privilege of working with 300 to 400 business people. In my experience, generally when they invest in something that they understand, and within biblical principles, they earn a profit. However, when they invest in something that they don’t understand, frequently they lose money.
God warns us of this in Proverbs 19:2: “It is not good to have zeal without knowledge, nor to be hasty and miss the way.”
As applied to investing, this proverb warns us that it is not good to be excited about a particular investment without having a thorough knowledge and understanding of it. If you have been asked to commit to an investment without having sufficient time to obtain an understanding of it and to pray about it, then I strongly recommend that you not invest.
Whether you plan to build a house, an investment portfolio, or a retirement fund, God’s Word emphasizes the importance of understanding, wisdom, and knowledge.
By wisdom, a house is built, and through understanding, it is established; through knowledge, its rooms are filled with rare and beautiful treasures. (Proverbs 24:3, 4)
In my view, the level of knowledge that you need to obtain before acquiring a particular investment is to understand the nature of the investment, what has to occur for the investment to be profitable, and what could occur that would make the investment a loser. Historical returns and historical volatility are helpful. However, they provide no guarantee of future returns.
For example, in regard to a mutual fund, you need to understand the objective of the fund, the track record of the fund manager, and have knowledge and understanding of the 10 largest holdings within that fund. Knowledge and understanding of the markets in general as well as the economy, on a “macro basis,” is important as well. Generally speaking, the more you understand about a particular investment and the more experience that you have, the better.
However, remember that on average only about 15 percent of all professional money managers beat the relevant index, notwithstanding their extensive knowledge of the stocks in their portfolio. The truth is, the best investment today depends on what happens in the future. Since no human can consistently predict the direction of any stock or any market (James 4:13–15), it is critical to rely on God, who is the key source of wisdom and understanding.
The fear of the LORD is the beginning of wisdom; all who follow his precepts have a good understanding. (Psalm 111:10)
In other words, as you consider a particular investment and develop your investment strategy, you must “follow God’s precepts,” which requires that you understand and apply God’s investment principles. Clearly, if you do not understand God’s investment principles, you won’t apply them. Secondly, you need to acknowledge that only God knows the future (Isaiah 46:9, 10), and therefore only God knows which investments will do well. Therefore, in prayer, ask God to direct you according to his will.
Trust in the LORD with all your heart, and lean not on your own understanding; in all your ways acknowledge Him, and He shall direct your paths. (Proverbs 3:5, 6 NKJV)