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Bible Verses to Help Us Understand Today’s Episode

Diversification is a key, and critical aspect of investing.

  • Ecclesiastes 11:2 – “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land.”
    • One of the best-known verses to understand why one needs to spread out their assets (their wealth) so that it is properly protected from sudden economic, financial and environmental changes.

Slow and Steady wins the race.

  • Proverbs 21:5 – “Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty.” (NLT)
    • Notice that it does not say “timing/quickness/intellect” brings prosperity, but GOOD PLANNING and HARD WORK!  Both things that God blesses throughout Scripture!

Through hard work and discipline, success is brought.

  • Proverbs 28:19–20 – “Whoever works his land will have plenty of bread, but he who follows worthless pursuits will have plenty of poverty. A faithful man will abound with blessings, but whoever hastens to be rich will not go unpunished.”
    • Again this concept of “hard work” is in the spotlight for the successful person.  But it also includes the discipline of “faithfulness,” in contrast to the one that looks toward getting rich quick or seeking “worthless” endeavors!

Being a Faithful Steward.

  • Luke 16:10 – “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.”
    • Beyond discipline is a great virtue of one being faithful and trustworthy!  The one that proves to be dishonest cannot, and should not be trusted with much.

 

Now, with a good solid Biblical overview of some key financial principles, let us keep these thoughts in mind as we shift our attention to investing. Specifically, something that we hear often is a comparison between one’s personal investments in relation to the Standard and Poor’s 500 list (S&P 500).  

 

Why is there Danger in Comparison?

There is danger in comparison, especially in the world of investing. What are the 2 big dangers of investing? Fear and Greed. Most fear and greed arise from comparing yourself to the overall market and not considering the long-term plans and goals. What does it matter today if your accounts have dropped 20% if you don’t need those accounts for 10 years? Don’t compare your expectations against your reality, and then make decisions that are not ultimately in your best interest. Be aware of averages.

The other comparison danger is when you start talking to your neighbors or coworkers, or you hear about how the S&P is doing on the radio, and you think that your personal portfolio should be doing just as well. If you’re beating the market, you might feel really good! If you’re losing more than the market, you would feel pretty bad. 

The problem with comparing is that not only is it inaccurate, it causes you to do the wrong thing.

 

How do we mitigate Risk? The Value of Diversification

What you aren’t taking into consideration when comparing your portfolio to the S&P 500 is diversification. The S&P 500 consists of only stocks of the 503 biggest companies in America. You get the good, the bad, and the ugly. You don’t get the amount of diversification that you would get in a balanced portfolio. 

In the first quarter of 2023, the S&P was up 8%. Many of our clients were up 2-3%.

Why such a difference? Because:

  • Our clients have stocks and bonds (Mutual Funds) in their portfolios, not just all stocks.
  • The S&P500 had 80% of its performance delivered by 3-5 companies. Only 3-5 companies made up 80% of the returns! Apple, Microsoft, Facebook, NVDIA
    • To further explain…The Market Cap of Apple at $2.7T is greater than the entire market cap of the Russell 2000 Combined. The Russell 2000 is comprised of 2000(ish) mid-to-small companies. If you add up the market caps of each one of those companies, they are all worth less than one company; Apple. Apple is the biggest company, by market cap, in the world right now (May, 2023).

 

Should I Follow the S&P 500?

There is value in being aware of what the market is doing. There is value in knowing how the S&P or the NASDAQ are doing. But the value isn’t in comparing you against them, it is about knowing the state of the market in general. Most investors who are diversified are not going to be seeing performance in their accounts that mirrors or matches the index because they used different asset classes, and they have different objectives.

 

How is the S&P 500 Comprised?

You might think that the S&P 500 has like a hundred dollars in every single company. Then we assess the value of that $100 in these companies over time. That makes sense. But that is NOT reality. The reality is that certain companies make up a much larger percentage of weighting within the S&P 500. Therefore, just a handful of companies can make or break the performance of the S&P 500, which may not reflect how well or poorly the overall market is actually doing! There are indexed versions that equal weight, like the S&P 500. Such equal-weight indexes generally have had worse performance over the past several years than the generic index they’re tracking, because they are not allowing a few of the very big companies to drive the returns that the overall index is experiencing.

Finviz Heat Map

 

Stewardship Application

Stop Comparing to the S&P 500. Simple! Stop comparing your investment portfolio to the S&P 500.

As we mentioned in the beginning of our time you ought to:

  • Diversify your investments!
  • Remember that slow and steady wins the race (with investing)
  • Hard work and discipline brings about success (and God’s blessings!)
  • Be faithful in your investing.

1 Corinthians 4:2 – “Moreover, it is required of stewards that they be found faithful.”

 

 

Next Steps

 

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The topics discussed in this podcast are for general information only and are not intended to provide specific investment advice or recommendations.  Investing and investment strategies involve risk including the potential loss of principal. Past performance is not a guarantee of future results.

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