How to Make the Right Investing Decisions
by Austin Pryor for Sound Mind Investing
Having lived through the thrill of victory (the late 1990 bull market) and the agony of defeat (the 2000-2002 bear market), many people today are finding it increasingly difficult to know which is the “right” step to take. They wonder:
* “Is this a good time to buy stocks?”
* “Should I sell some of my employer’s stock in order to diversify?”
* “How much of my retirement plan should I put in stocks versus bonds?”
* “If I sell this losing investment and buy something else, will I be better off?”
Since we cannot know the future with certainty, it’s obvious that no investment portfolio will ever be perfectly positioned to profit from upcoming events. As the future unfolds, it will always be possible to point to ways we could have made more money than we did—and some of them will appear incredibly obvious in retrospect! This means that it’s pointless to think of the “right” investment portfolio simply in terms of maximizing profits. If that is your approach, you will always be frustrated and second-guessing your decisions.
The “right” portfolio
The “right” portfolio is one that realistically faces where you are right now, looks years ahead to where you want to go, and has a very high probability of getting you there on time. Let’s look at some of the characteristics of the “right” steps to take.
The right investing decision is one that is consistent with a specific, biblically sound long-term strategy you’ve adopted. One common trait that I find among many of those I counsel is that their current investment portfolio tends to be a random collection of “good deals” and assorted savings accounts. Each investment appears to have been made on its own merits without much thought of how it fits into the whole.
I find savings accounts (because the bank was offering a “good deal” on money market accounts), company stock (because buying it at a discount is a “good deal”), a savings bond for the kids’ education (because they read an article that said they were a “good deal” for college), a universal life policy (because their insurance agent said it was a “good deal” for someone their age), a real-estate partnership (which their broker said was a “good deal” for people in their tax bracket), and 100 shares of XYZ stock (because their best friend let them in on this really “good deal”).
I want you to become an initiator (one who develops an individual investing strategy tailored to your personal temperament and goals) rather than a responder (one who reacts to sales calls, making decisions on a case-by-case basis). Then you can select the appropriate investments accordingly. The right investment step is the one that you seek out purposefully, knowing where it fits into the overall scheme of things.
Take your time
The right investing decision is one where you’ve taken plenty of time to pray and to seek trusted, experienced Christian counsel. Because your decisions have long-term implications, you should take all the time you need to become informed. Don’t be in a hurry; there’s no deadline. A good friend once commented to me: “The Christian life isn’t a destination; it’s a way of travel.” Likewise, you’re not under pressure to predict the best possible portfolio for the next six months or make next year’s big killing. Your goal is to settle into a comfortable investing lifestyle that will serve you well for decades.
You need time to pray, ask for the counsel of others, and reflect. You should consider the alternatives, examine your motives, and continue praying until you have peace in the matter. If you’re married, you should pray with your spouse and talk it out until you reach mutual agreement. You’re in this together and, rain or shine, you both must be willing to accept responsibility for the decision. This will add to your steadfastness during the occasional rough sledding along the way.
The right investing decision is one that you understand. This typically involves at least two things.
1. First, it’s relatively simple. It’s not likely that your situation requires exotic or complicated strategies. In fact, the single investment decision of greatest importance is actually pretty easy to understand. It’s deciding what percentage of your investments to put in stocks (where your return is uncertain) as opposed to bonds and other fixed income investments (where your return is relatively certain). This one decision has more influence on your investment results than any other.
2. And second, you’ve educated yourself on the basics. When you’re able to give a simple explanation of your strategy to a friend and answer a few questions, you’ve probably got at least a beginner’s grasp. The right investment step is the one where you understand what you’re doing, why you’re doing it, and how you expect it to improve matters. That’s the least you should expect of yourself before making decisions that can dramatically affect your life and the lives of those you love. Sound Mind Investing’s Fund Upgrading and Just-the-Basics portfolios are good examples of effective, yet easily understood, strategies.
The “right” investing decision
The right investing decision is one that is prudent under the circumstances. Does it pass the “common sense” test? How much of your investing capital can you afford to lose and still have a realistic chance of meeting your financial goals? The investments that offer higher potential returns also carry greater risks of loss. The right portfolio for you is not always the one with the most profit potential.
For example, it’s usually best not to have a majority of your investments in a single asset or security. For that reason, people who have large holdings of stock in the company they work for often sell some of it in order to diversify. If the stock doubles after they sell it, does that mean they did the “wrong” thing? No, they did the right thing. After all, the stock could have fallen dramatically as well as risen (ask the former employees of Enron).
What would a large loss have done to their retirement planning? The right investment step is the one that protects you in the event of life’s occasional worst-case scenarios. Generally, this moves you in the direction of increased diversification.
Many people seem to find investing to be a nerve-racking, if not downright scary, experience. Making investment decisions, and then watching the results unfold, can be stressful. Do you become anxious when circumstances compel you to make important investing decisions? Most of us do to one degree or another. If my mail is any indication, a great degree of financial fretting is common. Three recurring comments lead the list of ways my readers express their concerns.
1. “There’s so much at stake. I’m afraid I’ll make the wrong decision.”
2. “I don’t have much experience. I’m afraid I’ll make the wrong decision.”
3. “My savings aren’t making enough now, but if I make a change I’m afraid I’ll make the wrong decision.”
What is the “wrong” decision, anyway? If you feel a wrong decision is like saying 2+2=5, then you’re off track; such thinking implies investing decisions can be made with mathematical certainty. They can’t. This doesn’t mean the economy and investment markets are completely random, only that you’re dealing with probabilities, not certainties and predictable events. Scientists can predict with great accuracy when the next eclipse of the sun will occur decades into the future, yet they can’t tell you if the sun will be eclipsed by a thunderstorm and ruin next week’s football game.
All of this is actually good news. It means anybody can play. It’s like learning to drive a car. After a couple of lessons, you know enough to travel around town if you follow a few basic safety guidelines. After all, you’re not trying to qualify for the Indy 500. You just want to reach your destination. In the same way, once you understand Sound Mind Investing’s core concepts, you’re fairly well equipped for making whatever decisions you face.
© Sound Mind Investing
Published since 1990, Sound Mind Investing is America’s best-selling financial newsletter written from a biblical perspective.
Originally posted 8/8/2011.