Finances By The Book - Discipleship Course
Chapter 5
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Chapter Goals/Competencies:

  • Develop investment strategies based on biblical principles.
  • Determine which tools and techniques best suit your needs.
  • Integrate tax planning with investment planning.

Key Scripture: A generous man will prosper; he who refreshes others will himself be refreshed -- Proverbs 11:25

The Bible gives us many principles useful for investing our money. Below Ron Blue suggest useful biblical investment principles:

1. Do not presume upon the future. James 4: 13-15
2. Avoid speculation and hasty investment decisions. Proverbs 28:30, 13:11
3. Never cosign. Proverbs 22:26-27, 11: 15, and 17:18
4. Evaluate the risk of an investment. Luke 14:28
5. Avoid investments that cause anxiety. Psalm 131:1 & Matthew 6:31
6. Be in unity with your spouse.
7. Avoid high leverage situations. Proverbs 22:7
8. Avoid deceit. Proverbs 11:18
9. Tithe from the current increase rather than the final sale. Proverbs 3:9-10

Investments can be divided into two basic types—debt and equity. See Chapter 5 - Table 1.

Socially Responsible Investments

In recent years some investors have been concerned about how their money is being invested. Numerous firms now offer investments that appeal to the social responsibility of investors. Many religious organizations have long avoided investments in the tobacco, alcohol, and gambling industries. Some funds invest only in companies committed to life-supportive goods and services, and avoid those that manufacture war-related products. Others invest only in small business, higher education, and family farming, ignoring companies with records of job discrimination or environmental violations. If you are interested in socially responsible investments, you can obtain a list of possible choices from your financial planner. But, as with any investment, the one you choose should first meet your own criteria and long-term goals.

Certificates of Deposit (CDs)

Certificates of Deposit have remained popular primarily because they are simple, safe, and predictable. For many years the only type of CD available was plain and straightforward with a fixed rate. Now CDs are available in many varieties: (1) With Variable-Rate CDs the investor gambles that the prime rate will go up. In the process the predictability of return is lost; (2) A Rising-Rate CD has a continually higher rate each time it is rolled over, but it earns less during the early months, resulting in a lower yield; (3) No-Penalty CDs allow withdrawals at any time, but this type may pay a lower interest rate than a regular CD; (4) Stock-Indexed CDs combine bank safety with market performance, but there is no guaranteed return on this investment.

If you are in doubt concerning which CDs to purchase, ask your representative exactly how much money you will realize (less fees and charges) when your CD matures. Be sure to compare the actual rates of each institution.

The Accumulation Phase

In this phase of life, normally from ages 25-60, you accumulate not only material possessions but also investments to accomplish your long-term goals. Your accumulating strategy depends on having a cash flow margin. Determining the best way to use this margin depends on your personal goals, previous commitments, personal priorities, and all other alternatives available.

The following Sequential Accumulation Strategy is recommended for the accumulation of assets. Use the first dollar of cash flow margin to accomplish Step 1. Then use any additional dollars to accomplish every other step in sequence.

Step 1—Eliminate short-term debt, which includes all credit card and consumer debt.

Step 2—Set aside one extra month’s living expenses in a savings account.

Step 3—Place an emergency fund of three to six months’ living expenses in a money market fund.

Step 4—Set up an interest-bearing account, preferably in a money market fund, for all planned major purchases.

By completing Steps 1-4 in order, you have eliminated the need to make a decision when an investment alternative comes to you. If you have not completed Steps 1-4, let the option go by until you are financially able to invest.

Step 5—Accumulate to meet your long-term goals with safety and availability as your chief criteria.

Step 6—Use investment dollars to speculate in higher risk investments. (You may find, however, that you would rather adopt a preservation investment strategy.)

Your primary objectives are to get the highest yield and the greatest liquidity with the lowest risk. As you begin to investigate various investments, you will discover certain tools and techniques. Each tool and/or technique uses one of the specific investment products to accomplish its objective. See Chapter 5 -Table 2 for these tool and tools and techniques.

Ron Blue suggests three types of investments for those still accumulating:

Money Market Instruments. Certificates of Deposit (CDs), Treasury Bills, savings accounts, and money market funds offer liquidity and yield with little risk of loss of principal.

Growth Mutual Funds. These investments come in three types: long-term growth funds, income funds, and a combination of the two. They provide the advantages of professional management, diversification, total liquidity, and investments to fit the individual.

Real Estate Investments. These investments may be either personally owned rental type real estate or public real estate partnerships. Since personally owned real estate takes time and experience and has a fairly high risk, a novice should consult a counselor before investing. Public real estate investments offer the same growth potential without the high risk of personal ownership.

The Preservation Phase

By this phase people have hopefully accumulated enough and are attempting to preserve their investments against inflation, deflation, monetary collapse, and seesawing interest rates. Only 2 percent of Americans, however, ever reach this stage. A good strategy for your entire portfolio in this phase accomplishes four specific objectives: to maximize liquidity, maximize growth, maximize yield, and minimize risk.

Further Study: "Interest," NIDB, p. 469.

Life Application:
Before making a specific investment, as yourself the following questions. The investment criteria contained in them will help you determine if the investment is a wise one.

-Do you fit a long range plan?
-How does it affect other areas of my portfolio?
-What is my purpose for making it?
-What is its downside risk, and can I handle that risk?
-If the investment does what it says, is it worth the risk?
-What are the other alternatives? Am I caught in a "binary trap"?
-What is the best use of these funds at this time?
-Will it balance and diversify my portfolio, or am I overpurchasing one type of asset?
-Does the broker/dealer have expertise in the offering?
-Does the general partner a reputable individual?
-What have earlier programs returned in relation to the amount invested?
-What kind of a front-end load is going to the general partner?
-Are earlier track records legitimate, or has the structure of the program changed?
-What would happen to the investment if any of the key partners died? Would the investment carry on and do as projected?
-What kind of competition is there, and will it affect the investment?
-Are the assumptions used to put the numbers together valid and realistic?
-How is the deal leveraged?
-Does the deal assume long-term or short-term leases? What type of tenants will you have?
-Has an appropriate market analysis been prepared?
-What will the investment be worth in five years? Could it be given away then? What would the tax consequences of a subsequent gift be?
-When will I get my investment back? What is my expected return on the investment?
-Will the tax incentives withstand close scrutiny by the IRS?
-What are the terms of the investment? How is it structured with regard to cash flow and income taxes?
-Am I personally liable for anything?

In view of the above questions, you must be aware of three important principles:
1. There is a difference between an adequate and a maximum return. It is impossible to "hit a home run" every time. If you have a maximum return, the risk will be high. To determine what you feel is an adequate return, ask, "What do I need?"
2. Risk is the measure of volatility. You can choose a safe investment with a low yield or a risky one with a high yield.
3. The Rule of 72 will help you determine how many years it will take your investment to double. Simply divide the interest rate into 72. For example, an investment at 9 percent will double in eight years. This rule, however, works against the borrower.


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