Assess your Tolerance for Risk, and Invest Accordingly
By: Tom Copland
In Ecclesiastes 11:1–6, God recommends the assumption of a reasonable amount of risk within your investment portfolio.
“Cast your bread upon the waters, for after many days you will find it again” was a metaphorical expression used in the grain trade that illustrated the potential successful prospects of a business investment. God instructs the farmer, who is also an investor, to “sow your seed in the morning, and at evening let not your hands be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well.” In addition, over-cautiousness is discouraged——“Whoever watches the wind will not plant; whoever looks at the clouds will not reap.”
In Proverbs 31:10–31 the “wife of noble character” is involved in several equity-type investments. For example, in verse 16, “she considers the field and buys it; out of her earnings she plants a vineyard.” There are many other examples of investors in the Bible, such as the servants in the parable of the talents (Mathew 25) and Solomon and Job.
In short, it is biblical to assume some investment risk. However, God demonstrates how to minimize your risk by diversifying your investments into seven or eight different categories, because you do not know what disaster may come upon any particular company or sector of the market (Ecclesiastes 11:2.) See my two financial moments on biblical diversification for further details.
On “a macro basis,” the risk of any portfolio is generally reflected by its allocation between equities and safe investments such as Canada bonds/GICs, etc. The appropriate amount of investment risk that a Christian should assume will depend upon numerous factors, such as your age, when you will need the money, and your tolerance for risk.
Assessing your tolerance for risk can be difficult. Generally, it is necessary to experience some good and bad markets before you will really understand your own personal risk tolerance. Certainly, if your present portfolio allocation is too volatile (i.e., the fluctuations cause you to be anxious) then reduce equities and increase short-term government of Canada bonds. In his book, Sound Mind Investing, Austin Pryor has an excellent questionnaire that can help you assess your tolerance for risk. (See soundmindinvesting.com.)
Based on God’s investment principles, it is not appropriate for a Christian to be overly cautious (which may reflect a mindset of fear); nor is it appropriate for a Christian to be too aggressive (which often reflects an attitude of greed). Both extremes are outside of God’s will.
Under normal market and economic conditions, generally, a conservative investor should have at least 20 percent in equities, while an investor with a high tolerance for risk, should not go beyond 80 percent. The average person may feel comfortable with an allocation of approximately 50 percent in equities. The types of equity investments within your portfolio (i.e., “blue chip stocks” as opposed to “speculative stocks”) will also affect the level of risk you are assuming. In all cases, I strongly recommend that no debt be used for investments because God’s Word strongly discourages the use of debt (Proverbs 22:7).
In summary, depending on God’s wisdom (James 1:5), assess your tolerance for risk and invest the money that God has entrusted to you [1 Corinthians 4: 2], according to his principles [Psalms 119:24] and his specific will [Psalms 25:12].