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Don’t Put All Your Eggs in One Basket

retirement-planning

 

The Bible is one of the most widely used resources for financial planning. The book of Proverbs contains many verses on the subject of financial management. However, one of King Solomon’s most well know financial tips is not found in Proverbs, but is found in Ecclesiastes. In Ecclesiastes King Solomon gives specific advice in the area of portfolio diversification. Scripture says, “Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth” (Ecclesiastes 11:2, King James Version). Spreading risk to seven or eight investments is the biblical recommendation given by Solomon to prevent a large loss from a single event in the value of a portfolio. The credibility of Solomon’s advice is proclaimed by 1 Kings 4:10. “And Solomon’s wisdom excelled the wisdom of all the children of the east country, and all the wisdom of Egypt” (King James Version). The textbook explains the value of having a diversified portfolio. “Portfolio diversification works because prices of different stocks do not move exactly together” (Brealey, Myers, & Marcus, 2012, p. 329). The fact that stocks move independently impact how corporate managers invest the corporation’s assets. Hyland, & Diltz state, “If managers perceive that their personal wealth is tied closely to the fortunes of the firm, they may have an incentive to diversify the firm in a manner and to a degree that may become detrimental to shareholders” (Hyland, & Diltz, 2002). Managers, whether they are concerned with person wealth or not, are looking for effective ways to diversify. One study believes that investing internationally is a great way to have maximum diversification. “To get the maximum benefits from diversification, they (investors) should invest internationally because of the larger potential for risk reduction stemming from lower correlation between assets” (Barras, & Isakov, 2003, p194). “Investors who have adopted a single strategy approach to their investments have often been shocked by the uncertainty and volatility of returns in their portfolios” (Hirsch, 2007). Scripture gives a very powerful illustration in Proverbs 31 of a woman well diversified in her business affairs. The virtuous woman is involved in many different business ventures such as textiles, trading, charity work, and public speaking. To lessen the impact that market changes have on an individual or on a corporation it is a must to follow the advice of King Solomon in the area of risk reduction.

References
Barras, L., & Isakov, D. (2003). How to diversify internationally? A comparison of conditional and unconditional methods.Finanzmarkt Und Portfolio Management, 17(2), 194-212. doi:http://dx.doi.org/10.1007/s11408-003-0203-5
Brealey, R., Myers, S. & Marcus, A. (2012). Fundamentals of Corporate Finance. (7 ed.). New York: McGraw-Hill Irwin.
Hirsch, B. (2007, Aug 06). Diversify your portfolio to reduce risk and volatility. Business Day. Retrieved from http://search.proquest.com/docview/334129821?accountid=12085

Hyland, D. C., & Diltz, J. D. (2002). Why firms diversify: An empirical examination. Financial Management, 31(1), 51-81. Retrieved from http://search.proquest.com/docview/208177249?accountid=12085

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