Should you go all in?
My favorite book of the Bible lately has been Ecclesiastes. (Yes, I know I’m weird.) I find its honest discussion of the meaning of life to be insightful and timeless.
When reading it recently, I was surprised to discover that the author (referred to as “the Teacher”) provides some investment guidance amid his reflections on life’s purpose.
The case for diversification
Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.
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: 2, 6
As the popular saying goes, “Don’t put all your eggs in one basket.”
This makes intuitive sense, although individual investors often screw this up. Enron employees who held significant company stock learned this lesson the hard way.
Financial theory teaches us that there are two types of risk: systematic and idiosyncratic.
Systematic risk cannot be eliminated. You must bear this risk if you want to participate in the market. The good news is that you get compensated for taking this risk through the promise of higher returns (referred to as the “equity risk premium”).
Idiosyncratic risk refers to firm-specific risks that are uncorrelated with the overall market. As an illustrative example, imagine the returns of two companies are highly volatile (i.e. risky), but they always perfectly offset each other. When stock A goes up 10%, stock B goes down 10%, and vice-versa. The market isn’t going to pay you to bear this risk because there is an easy solution: buy both stocks. A portfolio holding these perfectly inversely correlated stocks has zero risk in aggregate. No risk = no reward.
Diversification is the antidote to idiosyncratic risk. In fact, by owning the whole market you can eliminate idiosyncratic risk from your portfolio altogether. It’s one of the reasons that Bogleheads like me love total market index funds. Vanguard’s total market equity index (VTSAX or VTI) owns ~4,000 stocks and tracks an index that “represents 100% of the US investable equity market.” With this single holding, modern investors can achieve levels of diversification that were impossible to accomplish in previous eras*.
I think it’s pretty cool that the Bible talks about the wisdom of investment diversification. But it also got me thinking: the Bible isn’t always pro-diversification.
The call for singular devotion
God makes it remarkably clear to Moses that he expects the people’s full devotion.
The first of the ten commandments is unambiguous: “You shall have no other gods before me”.
As a fast follow, commandment #2 prohibits idols “for I, the Lord your God, am a jealous God” (Exodus 20:3-5).
This monotheistic devotion to the one true God is fundamental to the Jewish faith, summed up beautifully in the opening words of the Shema: “Hear, O Israel: The Lord our God, the Lord is one” (Deuteronomy 6:4).
Flash forward to the New Testament and we see the same theme. As Jesus’ ministry is ramping up, the people are amazed by his miracles. Amid the excitement, the following exchange makes the cost of discipleship clear:
Then a teacher of the law came to him and said, “Teacher, I will follow you wherever you go.”
Jesus replied, “Foxes have dens and birds have nests, but the Son of Man has no place to lay his head.”
Another disciple said to him, “Lord, first let me go and bury my father.”
But Jesus told him, “Follow me, and let the dead bury their own dead.”
Matthew 8:19-22
Jesus wasn’t interested in being on the disciples’ agenda, unless he was the only thing on the agenda.
Ironically, the Romans referred to Christians as atheists because they refused to worship the Greco-Roman pantheon of gods.
Where is wisdom?
So how are we to think about the “wisdom” of diversification?
Musing this question made me think of this couplet of proverbs:
Do not answer a fool according to his folly, or you yourself will be just like him.
Answer a fool according to his folly, or he will be wise in his own eyes.
Proverbs 26:4-5
This is head-scratching. These back-to-back verses literally advise opposite actions. But this is no contradiction – after all, they were written right next to each other!
The insight is that both can be right: true wisdom is being able to discern which proverb to apply based on a situation’s context.
Returning to diversification vs singular devotion, the Bible is clear on certain topics (e.g. complete devotion in marriage), but many life situations will require us to ask for God’s wisdom and discernment.
Picking a single sport as a two-year-old and never trying anything else is foolish. Dabbling in everything and never developing an expertise can limit your career.
Reflecting on my own life, I think I’ve nailed some “breadth vs depth” decisions, and I know that I’ve erred on others. I suppose this is inevitable as we navigate life and grow in our walk with the Lord.
We are all still “work in progress.” As Wormie tells his friend Hermie the caterpillar, “God’s not finished with you yet” (in Max Lucado’s beautiful children’s book).
Ecclesiastes is part of the “wisdom literature” in the Bible. And thankfully, we worship a God who has promised to give us wisdom – all we have to do is ask.
“If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you.”
James 1:5
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In what areas (or phases) of life has diversification served you well? When has going “all in” been the optimal path? Would love to hear in the comments!
Postscript
*Investment opportunities are infinitely more accessible now than they were thousands of years ago. The Teacher in Ecclesiastes argued for diversification by advocating for 7-8 holdings. I wouldn’t read this number literally today – owning only 8 stocks would be a wildly undiversified portfolio. Own the whole market!