… and a season for every activity under heaven” (Ecclesiastes 3:1).
The seasons of life include economic seasons of plenty and famine, both for nations as well as for us on our individual journeys. Nothing can completely insulate us from the occasional cyclic downturns. Our government can’t. Our financial advisers can’t. And certainly, Sound Mind Investing can’t.
Life is filled with uncertainties. There are always reasons for concern in the economy and markets. But we can manage our financial affairs so that when the unexpected comes along, we can isolate the damage it does. The blueprint for planning in this manner is given to us in the Scripture, and it is incorporated into the strategies taught here at Sound Mind Investing (SMI). Since 1990, we have been teaching the importance of:
* living within one’s means,
* being debt-free,
* having a 3-6 month contingency fund,
* and investing from a personalized strategy of diversification that accurately reflects one’s season of life and risk-taking temperament.
It’s up to each subscriber to accept responsibility for following these principles and adhering to their plan regardless of outside influences. Those who have done so, I would think, are in good shape to deal with the present financial upheaval in which we find ourselves.
In reading some of our blog comments and message board posts, it becomes obvious that some SMI subscribers have an unrealistic view of life on the investing high seas, and expect a smoother sailing experience than we will ever be able to deliver.
We don’t make market predictions, claim omniscience, or promise to shelter Upgraders from all storms. We have said it’s reasonable to expect that our Upgrading strategy, if followed faithfully, will deliver market-beating returns over time. Nothing has happened this year to shake my view of that likelihood, and my own retirement funds are still heavily committed to that strategy.
Fund upgrading recognizes there is “a time to plant and a time to uproot” (Ecclesiastes 3:2b), and provides guidelines for doing that systematically. Our approach to planting and uprooting, and planting some more, has worked well for a long time. However, it does not protect us from having losses along the way. Some funds, unfortunately, don’t do as well as hoped and get uprooted quickly.
The gains, over time, far outweigh the losses. In discussing the risks of owning stocks, we have frequently pointed out that risk decreases as your holding period increases. Consequently, to be reasonably safe, our oft-stated view is that you shouldn’t have money invested in stocks that you can’t leave there for at least five years. In an editorial from a few years ago, I included a table showing that, since WWII, 97% of the time a broadly-diversified portfolio made up 50% of large companies and 50% of small companies was profitable when held for at least five years.
As Mark Hulbert has pointed out, the goal is not only to make money, but to make more money than you would have if you simply invested in ultra-safe 90-day U.S. Treasury bills. Otherwise, why endure the risk, not to mention the emotional roller coaster? His table showed that 26% of the time, stocks didn’t beat T-bills. That’s about one of every four 5-year periods. As he says, “Hardly unusual, in other words.”
So, is it worth the wild ride? For the highly risk-averse investor, perhaps not. But don’t forget the flip side of the data — almost three out of four times, stocks return more than T-bills. In the average 5-year period since WWII, T-bills have returned about 5.0% annually; the stock portfolio described in the editorial returned 13.6%. So, in return for running the 1-in-4 risk that your stocks won’t outperform T-bills (but will, with a 97% probability, still make you some money), you get far greater returns during the other 3-in-4 occurrences.
The question is not will the market be higher in three months, or six, or even 12. The question is will the market be higher five years from now than it is today. I believe it will be. If you tend to agree, there is no cause for alarm at present. If you disagree, you would likely be better served by an investing strategy other than Upgrading.
I’ve taken time to point out these basic principles, which should be quite familiar to long-time readers, to encourage those who just need to be reminded of old truths. I hope you will see the reasonableness (and long-term profit potential) of staying with your plan.
I take comfort from this excerpt from Ron Blue’s 1994 book Storm Shelter, which reminds us that “What has been will be again, what has been done will be done again; there is nothing new under the sun” (Ecclesiastes 1:9). Ron points out that while economic uncertainty is certain, God’s principles are adequate for our protection. They’ve been tested through the centuries and never found wanting.
The picture is as clear in my mind as it was years ago. As I pulled off the interstate en route to my office, I did not see the road markers; instead my eyes swam with the signs of the times. The year was 1982. Interest and inflation rates had soared to all-time highs, investors faced crushing 70 percent tax brackets, and the price of gold leapfrogged daily. Taking stock of the situation, most analysts warned of a devastating financial explosion within the next few years.
As I drove to work that day, the economic consequences seemed both crippling and inevitable. I had just launched our investment and financial counseling firm. How, I wondered, were we supposed to respond to the clients who came to us for advice? Could anyone afford to purchase a home with 15 to 20 percent interest rates? Which kinds of investments and tax plans could stand up to double-digit inflation? And if the predicted monetary collapse did occur, would the resulting political turmoil uproot even the best-laid financial plans?
One of my fears as I navigated the interstate highway that day was that we faced a “worst-ever” economic climate. Yet economic uncertainty — and its accompanying effects on our sense of security and well-being — are nothing new.
Ten years earlier, in 1972, we had been saddled with Watergate and an oil crisis that threatened to throttle the world’s economy. Who can forget the lines at the gas stations or the rationing of fuel oil that winter? Then, too, I remember being hit with wage and price controls for the first time since World War II. And for the first time in my memory, the prime rate hit 10 percent. Economic security seemed an elusive, if not impossible, dream.
Ten years before that, in 1962, the specter of economic and political uncertainty had hovered in every corner of the world. Our amazement at seeing a shoe-pounding Nikita Khrushchev vow to “bury” us turned to horror as the Cuban missile crisis unfolded. At that point a nuclear holocaust seemed at least possible, if not imminent. And Vietnam lay just around the corner . . .
In 1952, in the shadow of the spread of Communism, amid the mud and blood of the Korean War, bomb shelters were among the best-selling items in the United States. In 1942, we faced Pearl Harbor and felt the full force of our entry into World War II. In 1932 we awoke to the nightmare of the Great Depression. And on and on and on. The point is that we will always face uncertainty.
Suddenly, I felt the subconscious click of the proverbial light bulb: The biblical principles of money management I had been teaching and using for years would work under any economic scenario. Armed with these concepts, I knew exactly how to help our clients weather the coming storm, no matter how hard the financial winds blew.
The predicted financial blowout never did occur. Yet as our business grew in the years that followed, we faced a thousand different financial situations that seemed specially tailored to test the worth and endurance of the money-management concepts our firm espoused. But in each and every case the biblical principles held fast, strengthening our clients’ economic positions — and bringing them peace and security in the bargain.
Friends, just as you should not “grieve like the rest of men, who have no hope” (1 Thessalonians 4:13), neither should you be fearful like the rest of men who have no heavenly Father who has promised to “meet all your needs according to his glorious riches in Christ Jesus” (Phil. 4:19). So, keep praying, that the Father “may give you the Spirit of wisdom and revelation, so that you may know Him better” (Ephesians1:17).
Published since 1990, Sound Mind Investing is America’s best-selling financial newsletter written from a biblical perspective.
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