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Summary The investment community is divided on the importance of cash. This piece shows that it was very important for some ancient people. While there are references in the Bible regarding investing, there is scant advice on how to invest. The Talmud does offer investing advice, and this piece will show you how to use it, and how it performs. Biblical Diversification One of my passions has always been faith based investing, and using ancient texts to guide one’s money decisions. Jesus talked about money more than anything, except the kingdom of God. There are 101 verses in Proverbs about money, and there are many more in the Old Testamant. I have written about these topics before, but sometimes one should take another look at things to see if they still hold true. There is one, I specifically on which I want to focus. It is found in Ecclesiastes (11:1-6), and it comes from Solomon: “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.” Simply it means: Be involved in commercial enterprise. Invest in many things (seven is a special number). You simply cannot predict what will happen. Why should one diversify? As the English proverb says, “Don’t venture all your eggs in one basket.” If one concentrates all of their investments in one asset class, it is possible the entire investment could head straight to zero. Simply, diversification helps one to avoid unsystematic risks, those that are specific to particular investment or investment class. It goes beyond that, however. 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. (click to enlarge) Asset allocation is 15 times more influential than security selection and timing. Interestingly, the financial media spends the bulk of their market news in the latter. Of course, it is doubtful one would be able to sell much ad space if the media outlet spent the bulk of its time talking about asset allocation. When I see sites like the American Association of Individual Investors recommend seven asset classes for specific portfolios, I usually have a wry smile, and wonder if that was by accident or by design. Who knows? What is interesting is that Solomon did not specifically state how to invest. In fact there is no specific advice on how to invest in the bible. Talmudic Investing Now we look at the Talmud ; “…the body of Jewish civil and ceremonial law and legend comprising the Mishnah and the Gemara.” The Talmud evolved after the destruction of the second temple, and was the recordings of discussions and debates regarding the Torah. It was an attempt by Rabbinic Jews to write the oral law; an explanation of how to live under Biblical law. It was a guidebook on how to live. As for this piece, the focus is on the Tractate Baba Mezi’a folio 42a: R. Isaac also said: One’s money should always be ready to hand, for it is written, and thou shalt bind up the money in thy hand. R. Isaac also said: One should always divide his wealth into three parts: [investing] a third in land, a third in merchandise, and [keeping] a third ready to hand. Two parts of this investing strategy are pretty obvious. First, to invest in land simply means real estate. That is understood, and there are plenty of real estate investments one can make, some are in the form of real estate investment trusts (REITs) and are traded in the stock markets. Second, investing in merchandise means to invest in business; equity investing. It is the third part to this formula where there seems to be some disagreement. Where I see some debate is defining, “…and [keeping] a third ready to hand.” There are some who feel that means to invest in short-term securities which are safe. U.S. Government bonds would fit this quite well. Taken in context, though, the previous part of the discussion is pretty clear where it says, “One’s money should always be ready to hand…and thou shalt bind up the money in the hand.” The footnote to this passage states, “And not in another man’s keeping, so that advantage can immediately be taken of a trading bargain that is available.” To some, including me, this is a pretty clear conclusion that the Rabbi was talking about cash. The approach this is pretty simple. I used the following investments to track the value of a $1 investment since 1978: Wilshire US REIT Index Wilshire 5000 Total Market Index BlackRock Ready Assets Prime Money (MUTF: MRAXX ) The investments were divided in thirds, and rebalanced every calendar year. The chart shows the results: (click to enlarge) Someone who followed this strategy since 1978 would have realized an annual return of 10.25% (±10.44%). Compared to S&P 500 annual return of 11.58%, this is a strategy that holds up nicely, especially considering that 33% is invested in a Money Market Fund. What is more relevant is that it is less volatile than the S&P (±17.32%) for the same period. Why Should One Care? Let’s think about this. Solomon warns us of that we, “…do not know the path of the wind.” Rabbi Isaac says we should keep our money close in hand, which is similar to Deuteronomy 14:25, albeit that passage was referring to tithing. The key is that rabbinical texts suggest that one keep a certain amount in cash, and it is quite a bit of money. Why? The Bible is replete with verses about not knowing what tomorrow will bring. The Old Testament brings us: ” Do not congratulate yourself about tomorrow, since you do not know what today will bring forth. ” ~Proverbs 27:1 And let’s not forget that Solomon warns, “for you do not know which will succeed, whether this or that, or whether both will do equally well.” Was this a warning that we really do not know what will happen with our investments? I say, “Yes.” While the New Testament (albeit not part of the rabbinical text) tells us” ” You never know what will happen tomorrow: you are no more than a mist that appears for a little while and then disappears. ” ~James 14:4 This is just a theory, but I am willing to say that the Rabbi knew one should keep cash because of an uncertain future, and uncertain results. While the financial community is fairly split down in the middle when it comes to cash, it is important to keep a reserve so one can take advantage of opportunities. If one is fully invested, there is no way to buy new securities on the cheap without selling something; thus incurring a commissionable event. Remember the footnote, “so that advantage can immediately be taken of a trading bargain that is available.” One has to have cash on hand to take advantage of opportunities. During this downturn, one is unable to buy the stocks that just went on sale if all of their assets are otherwise invested already. Some proponents of modern asset allocation go as far as to suggest holding up to 15% in cash and its equivalents in a conservative portfolio. If 15% is considered conservative, then 33% would considered ultra conservative. Does this approach work? It depends on what one wants. If one wants to be fully invested in the stock market, that portfolio would yield a full 190% better result than the cash heavy Talmud portfolio over a 20 year period. One should remember, though, that same approach would have suffered a 37% loss in 2008 with no opportunity to respond. Meanwhile the Talmud portfolio would have only lost 24% in 2008, but still leave one with the ability to buy beaten down securities. It is really up to one’s personal psychology to decide. Conclusion I have often said that one should give up beating market averages . Investing is more about psychology, than one realizes. If sudden downturns force one to abandon a plan, then it is not a very good plan. If downside deviation keeps one awake at night, then one should consider a different approach; this is one that does work. It beats the two benchmarks that matter for most investors; zero and inflation. If one is looking for index funds for the Wilshire 5000 and REIT investments, consider BlackRock’s Total Stock Market Index (MUTF: BKTSX ) and BlackRock Real Estate Securities (MUTF: BCREX ) funds. Matching those with the previously mentioned money market fund, and one will have a nice three pack of mutual funds that will deliver over time. Happy Investing! Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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