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From Shoutitforlife.com

“Ship your grain across the sea;
after many days you may receive a return.
Invest in seven ventures, yes, in eight;
you do not know what disaster may come upon the land.

If clouds are full of water,
they pour rain on the earth.
Whether a tree falls to the south or to the north,
in the place where it falls, there it will lie.
Whoever watches the wind will not plant;
whoever looks at the clouds will not reap.

As you do not know the path of the wind,
or how the body is formed in a mother’s womb,
so you cannot understand the work of God,
the Maker of all things.

Sow your seed in the morning,
and at evening let your hands not be idle,
for you do not know which will succeed,
whether this or that,
or whether both will do equally well.”

~Ecclesiastes 11:1-6

No other set of verses in the Bible are as direct or simple when it comes to investing.  Ecclesiastes 11:1-6 is as direct as it comes.

First, one can see that Solomon is straightforward in telling his people that they must invest, and that the venture is for a long period (after many days).  He then says one has to, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”  Isn’t Solomon telling his people to diversify?  I would dare say, “Yes.”

The middle verses of this stanza are a warning to the people that one must not be idle, but be diligent with a plan to succeed and survive, for one does not know what life will bring.  Solomon concludes his thought by saying, “for you do not know which will succeed, whether this or that, or whether both will do equally well.”

Well, it just so happens that there has been groundbreaking studies to show that Solomon was correct.  Brinson, Hood and Beebower conducted a landmark study, “Determinants of Portfolio Performance,” and presented in Financial Analysts Journal (May – June, 1992) there was an update in 1996.  They showed that asset allocation decisions, far more than any other factor, affected the long-term performance of an investment portfolio.

In fact, Brinson and his colleagues show that asset allocation effects over 90% of a portfolio’s performance.  The results are illustrated in the chart below.Portfolio Performance

What does this mean for you?  Have a diversified mix of investments, including stocks from different sectors and bonds with different maturities.  If you want to keep it simple, own mutual funds in the following categories.

  • Large cap stocks
  • Mid cap stocks
  • Small cap stocks
  • International stocks
  • Emerging market stocks
  • Intermediate maturity bonds
  • Short duration bonds
  • High yield bonds
  • Niche investment, such as real estate or metals
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2 thoughts on “Solomon Says to Diversify Your Investments

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