Chapter 5: Investment Planning

• 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" (Prov. 11:25).  

The Bible gives us many principles useful for investing our money. Below Ron Blue suggests 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.  

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.

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. 

Key Scripture: "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" (Eccl. 11:6).  

Reducing the Risk  

With the present uncertainties in worldwide economic conditions, risks become more complex and investment growth more difficult to plan for. There are, however, three ways to reduce the risk taken in any one investment or on your whole investment portfolio: (1) Become personally knowledgeable about investments; (2) Use the advice of various experts since no one can be an expert in every area; and (3) Do not attempt to predict the future but instead diversify. Remember that even a completely risk-free investment portfolio will never give you peace of mind—only God can do that. "And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus" (Phil. 4:7).  

Investment errors can easily be made if care is not taken. Some common financial mistakes are:  

• Delaying decisions about your money.
• Not shopping around for the best deals.
• Losing track of your money.
• Investing without understanding.
• Paying too much in fees.  

Importance of Diversification  

Wall Street’s first rule of investment is diversification, which provides significant gains and less volatility. A loss in one investment will be offset by profits in others. "Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land" (Eccl. 11:1-2).  

Diversification should be done in three ways:  

By asset category—Ninety-five percent of your investment results will be determined by diversification of asset category, such as stocks, bonds, cash, T-bills, or real estate.  

By asset allocation—Allocate a specific investment within the category. For example, if you are investing 20 percent in real estate, do not invest all your money into one piece of real estate.  

By time period—Invest in different time periods. An effective way to accumulate money is to put a certain amount in each month (dollar cost averaging).  

It is important to remember that economic cycles are a fact of life. But wherever you enter the cycle is inconsequential. If you stay for the long-term, you will make a profit. Short-term investors usually lose. "He who gathers money little by little makes it grow" (Prov. 13:11). An important factor to consider is matching the time you actually have available with the amount of time it takes for a particular investment to operate. Several investments, such as annuities, IRAs, and zero coupons, need an appropriate amount of growing time in order to produce profit.  

Taxes  

Investors often make an investment with one objective in mind—to lower their taxes. However, that alone is not a valid objective. Investment planning requires that you first make a good investment and then consider the tax consequences. Every decision that causes a reduction in taxes has a corresponding cost associated with it.  

If you receive a tax refund, either some unusual circumstance has occurred late in the year or you are a victim of poor planning. As a believer, you are required to pay taxes. But many people fall into one of two pitfalls. They either have a short-term perspective on taxes, or they will do anything to reduce them. To give the government use of your money is poor stewardship, and you should never withhold more taxes than is necessary.  

There are four possible ways to help ease the "pain" of taxes legally:  

Time your expenses. Ask yourself if it is better to have your deduction this year or next year? There are legal ways to work certain expenses into the current year and income into the following year.

Shift your income. Give the investment to your children who will be taxed at a lower rate.  

Use investments to your advantage. You may choose to place your money in a tax-exempt investment such as a tax-free municipal bond, a tax-deferred investment such as an IRA or a Keogh, or a tax-favored investment with certain tax advantages such as depreciation.  

Take advantage of the tax law. Adjust your gross income through an IRA or Keogh plan; itemize deductions; use tax credits for child and dependent care; use special provisions, which require expert counsel; and use special opportunities in charitable contributions.  

If you have a complicated tax return, you will need to hire an accountant or financial planner. You might ask the following questions of any potential candidates:  

• What are the exact services provided?
• What do you estimate your fee to be?
• How long will the planning take?
• How long will you need to prepare the taxes?
• May I consult you later?
• Will you represent me if I should be audited?  

If you are worried concerning an Internal Revenue Service (IRS) audit, it is helpful to know that less than 2 percent of all taxpayers are audited. But several things can make you more subject to an audit. Making mistakes in mathematical computations and listing items on the wrong line are probably the two most common mistakes made by taxpayers. Also, the IRS gives value to different items on the return, so a greater score on any specified item may be picked up by the computer. Some of these items are a high income level, large investment gains (or losses), and unusually large deductions; therefore, accurate records should be kept.  

Often the problems can be cleared up through the mail. If they cannot and you are called into their office, you should prepare yourself in several ways:  

• Assemble all the documentation the IRS requests.
• Have proof for every deduction you have taken.
• Do not volunteer information; give only what they ask for.
• Finally, relax.

Life Application:

Complete Worksheet 5-A, "Income Tax Analysis," which appears below. You will need a copy of last year's income tax return and various other information to complete it. Copy the figures from the return and estimate for the current year.

Audio Teaching A

Audio Teaching B