What is the best investment? Part Two: Prudence

Prudence is a wise little girl. She takes just enough. She gives as much as she can, but only as much as she can. She courageously does many things, but only what can be done. She is cautiously daring.

Prudence is a necessity in investing. It has to do with Part One, which was all about introducing risk into the portfolio. Risk is good, but only so long as it is prudent. Imprudent risk has no reward.

Ecclesiastes chapter 11 tells you that when you chop down a tree you do not know which way it will fall, and that when you sow you do not know which seeds will be fruitful and which will not. We are then commanded to commit a portion to several causes because we cannot predict the future.

There are two kinds of risk that we could be exposed to in investing: risk of volatility and risk of losing everything. Volatility looks like your account going down in one period of time and back up in the next. Losing everything looks like…well, losing everything. We have all been told to stay invested: if you jump off the rollercoaster you will get hurt! Yes, this is true when we are riding a well-built rollercoaster. But if your portfolio is foolishly invested in only one stock, or five, fifty, or five-hundred you cannot be reasonably assured of success over the long term.

Another biblical principle to apply here is fidelity, in counterbalance to diversification. Once a prudent investing philosophy can be determined, we must be utterly committed to that philosophy, to the exclusion of all others.

Ugly truth: we know which stock made the best return last year, but we had no idea which stock that would be at the beginning of last year.

Beautiful truth: you do not need to know which stock will do the best in any year. You need coaching.

Simon Joshua is a licensed investment advisor representative at Cornerstone Wealth Partners in Michigan. He has structured his practice around investor coaching and committed himself to leading communities in establishing a legacy of fulfillment.

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