Investing In The Future
Simon and Tarsha are in their early thirties. They have a three year old daughter and are expecting another child in a few months time. The couple has carefully saved just over $60,000 in the eight years they have been married. Currently, this money sits in a couple of term deposits with their bank. In addition, they both have Kiwisaver accounts, with healthy balances.
While Simon earns a solid though unspectacular salary as a teacher, Tarsha is about to become a fulltime homemaker when the new baby arrives. This means that the part time income she has earned will no longer be available to supplement their living costs and savings plan.
Forms of investment
When Simon and Tarsha consider their financial investment options, it may seem all very overwhelming and confusing. Nevertheless, fundamentally there are really only two main avenues for them: either loaning money to a business in return for a fixed interest return, or buying an asset/business (or a share of one).[1]
- Predatory pricing
- Monopolistic practices
- Poor employment conditions
- Late payment of suppliers
- Environmental degradation
- Exploiting the poor
- In what way will our investment contribute toward economic productivity? Or is the company or fund we are investing in just “leaching” off the economy?[2]
- Is the expected return commensurate with the risks associated? Are we comfortable with the level of risk associated with the investment?
- Are we comfortable with the particular products or services the business produces/provides? Are they ones that are consistent with our values and beliefs? Who are they catering for – those with excess wealth (ie luxury goods/services) or a majority of society?
- What do we know about the ethics of the company we are investing in? Do we feel comfortable with their approach to environmental issues, workplace culture, employment matters, remuneration policies, health and safety, financial management, marketing, and attitude to competitors? What is their track history?
- Do we know anything about the character of the owners and/or senior management of the company? If so, do they appear to be people of integrity, honesty and justice?
They are seriously pondering what to do with the savings they have. But their decision-making is also tied up with what they do housing wise. The couple rent a two bedroom flat in a city suburb. Simon and Tarsha have been very involved in the local community church and have developed strong relationships, so they are reluctant to move.
Working out how they should invest their savings, is not easy. There just seems to be so many options. There’s a confusing array of financial terms and products bandied around – bonds, shares, on call accounts, property…. Then there are the stories of failed investments over the past few years – the horror stories of lost savings and so-called “safe investments” that have just evaporated without trace.
No wonder it seems simpler and less scary for Simon and Tarsha just to keep their money in the bank.
What is an investment?
When Simon and Tarsha talk, it becomes clear that like many of us, they use the word investment in many different contexts. Tarsha talks excitedly about the vege co-op she and a couple of friends have started in the neighbourhood, saying, “I’ve invested so much time in that project.”
When they share their dreams for the future, Simon notes, “We think giving our children so many opportunities has been a really good investment.” And commenting on their reluctance to put their savings with anyone other than the bank, they recount the experience of Tarsha’s parents, who lost some of their savings at the start of the Global Financial Crisis. “Putting their money into that company was clearly a risky investment.”
So what do we mean when we use the word “investment”? Regardless of whether we refer to investing in a relationship, business venture, or community initiative, we are essentially talking about pouring our resources (money, time, or gifts and abilities), into something or someone, with an expectation that there will be a pay-off or return, sometime in the future.
In essence: Putting in resources to produce a return. This pay-off might be any thing from building something good, growing character, or simply the satisfaction of making a difference. However, in the case of a financial investment, the payoff is clearly some form of monetary return.
Presently their primary form of investing is the loaning of money in the form of bank term deposits. In doing so, they are effectively loaning money to a business (bank) that is itself in the business of loaning money to other businesses and individuals.
If Simon and Tarsha were a little more adventurous in their loaning of money, they might also consider some form of bonds or debentures. While the terms vary, they are similar to a bank investment – giving a business your savings for a period of time in return for a fixed interest, plus the promise of repayment of the invested sum at maturity.
As for the second main type of investment – owning a business or asset – this can take several forms. Simon and Tarsha could either own and run their own business, buy a property, or purchase shares in an existing business.
Ethical investment
Simon’s Dad (Trevor) has encouraged them to consider putting at least some of their savings into buying some good quality bonds, or a few shares. He has told the couple that they are likely to significantly increase their return and that over the longhaul this could make quite a difference. However, while Trevor is right, for followers of Jesus like Simon and Tarsha, the question, “how much return can we get?” needs to be balanced by also asking, “how do we get the return?”
Regardless of whether we are loaning money or owning a business, our faith should influence how we make money. In other word, investing ethically is an important goal.
So what makes it “ethical”? Does it have to do with how the company makes its money, how it treats its suppliers, competitors, workers and customers, the environment, or how profits are used? The truth is, all these considerations are important.
If the business we are investing in (through either loaning money or ownership) is not fully our own, then part of the challenge is trying to identify how ethical the companies or investment products are. Gaining sufficient information on how they operate is not easy. While a broad screening can be achieved by avoiding companies involved in the armament, tobacco, gambling, and pornography industries, such discretion is still a very blunt instrument. It is sometimes much harder to establish whether companies are engaging in:
Developing a set of questions to use as a grid for evaluating the appropriateness or otherwise of each investment decision may be helpful. In this regard, some questions Simon and Tarsha might consider are:
Getting hold of this kind of info is not easy – particularly for large, multi-nationals. However, the more knowledge Simon and Tarsha have available, the easier it is to be confident investing in the enterprise.
The difference between investment and speculation
As an alternative to term deposits, bonds, or shares, one of Simon’s friends, Hugh, has suggested that the couple get into property investment. Hugh argues that given the fast rising prices in the major city a few hours north of where they live, the return on buying a rental there, makes this a no-brainer. He has even recommended a suburb to look at, where the property values increased 27% in the previous year.
When Tarsha raises the point that the expected rent from the property won’t pay for outgoings (costs) of owning it – interest, rates, insurance, maintenance etc., Hugh notes that while it might cost them a little of their own money in the short term, the potential profit is big when they come to resell the property in 3-4 years time. In fact, the return will be massive.
Hugh’s take on things betrays a major misunderstanding over what constitutes an “investment”. Essentially, it is helpful to differentiate between “investing” and “speculating”.
Techically, an investor is someone who is interested in putting their money into a business or enterprise that is both profitable and productive.
In contrast, a speculator is someone who is largely interested in short term capital gain and makes their decision of where to place their money on this basis.
Rental properties are a classic example of this mentality. In some countries like NZ, the most recent boom in residential property (2003-2007) was contributed to by large numbers of people buying rentals on the assumption that the capital value of these houses would continue to rise. Most of these “investors” bought properties that had no hope of a regular, positive return. In fact, many used the tax laws to “negatively gear” so that tax losses on their rentals could be credited against their personal tax due. In other words, they expected to make a loss on their investment! The effect of this behaviour was to accelerate demand for houses, which pumped up prices further – thus achieving the outcome such “investors” were gunning for in the first place – a tax free capital gain upon selling the property.
In reality, these were not “investors” at all. They were really just “speculators”. Their rental properties were not viable businesses. They were gambling on making a profit only by being able to sell their properties for much more than they bought them for.
In contrast, a property investor is someone who treats their rentals like any business – whatever is invested needs to earn a profit – a return. If a property investor considers that he/she can’t get a positive cash flow from a particular house, they don’t buy it.
A property speculator is happy to forgo a positive return, banking on the expectation that the value of their property is going to rise and so more than compensate them for the negative cash flow. They often have no real interest in providing a good service to tenants. The only reason they are in the game is to make a capital gain.
The same is true with many stock (share) market traders. Those who invest in shares primarily in the hope and expectation that these shares will increase in value are more speculators than investors. In contrast, those people who buy shares because they want to invest in the company over the longhaul, are genuine investors. They risk their money because they believe in the longterm profitability of the company. If the company is profitable, as a shareholder they will share in the annual dividends as well as the increasing share value of the company.
Other forms of speculation are even more scandalous. For example, those who play the foreign currency market – buying up a particular currency for the sole reason of expecting to profit from its increase in value. Or those who buy gold for the same reason.
This is nothing less than gambling. Ethically, I find such behaviour virtually impossible to justify from a Christian perspective. It adds nothing productive to the economy and simply profits on the vagaries of the market.
In contrast, businesses that export or import goods or services have very different (and much more valid) reasons for “hedging” foreign exchange. If their capacity to be make a profit from their business is at risk by fluctuating exchange rates, it makes good sense for them to hedge their bets and buy forward cover. Such behaviour is like fixing a mortgage interest rate for a term, to provide stability in costs.
The implications of this are very simple: owning shares or rental property requires us to take seriously our responsibility as a shareholder or landlord. Such ownership is not simply a means to an end. We are investing in products and services we believe are valuable for people’s lives.
An element of risk
One of the primary fears Simon and Tarsha have, is losing their hard earned savings through a failed investment. They’ve heard the horror stories – sharemarket crashes, property busts, failed finance companies, and fraudulent financial advisors, lawyers, and the like. And they’ve seen it happen with Tarsha’s parents. Consequently, they are somewhat reluctant to do anymore than keep it all tucked away in the bank.
However, all forms of investment carry some degree of risk. Even if Simon and Tarsha put their savings under their mattress there is risk. It could be stolen. The house could burn down. Or its value will be eroded by inflation – so that when they come to use it in two years time it is only worth say 90% of what it was when they first stowed it away.
All businesses carry risk. An engineering company producing steel containers for the shipping and rail industries is vulnerable to the risk that demand for containers drops and therefore the price shipping and rail companies are prepared to pay for containers is reduced. This might make the business unprofitable. Or there is the risk of changing technology. Someone may invent another way to transport goods on ships and trains that is much more efficient and cheaper than steel containers. In such a case, the engineering company may find themselves out of business.
Of course, some businesses are much less risky than others. A government owned enterprise is unlikely to renege on its obligations, unless of course the government is itself about to fall over. Likewise, a well-rated bank.
Nevertheless, it is a fair question to ask whether or not there is a limit to the level of risk Simon and Tarsha should take, as trustees of God’s resources.
While there is no definitive answer to this, we are called to be wise, prudent and responsible. Sadly, there are plenty of stories of us Christians chasing after promised “high return, fail-proof” investments. Unfortunately, we are not immune to greed, naiviety, and stupidity.
So examining our motives for investing in a particular company or product is important. Are we tempted to make a quick buck? Do we care about who might get hurt or lose out in the process? These are real considerations.
Two factors that should influence the level of risk we take on are our own temperament and giftings, and the stage of life we find ourselves in. Some of us are more entrepreneurial than others. The appetite for risk is much higher for those gifted with an eye for potential than for those who are naturally gifted to conserve. Knowing and understanding how God has made us is an important factor in determining what kind of investments we should make.
Neither Simon nor Tarsha are motivated or gifted to own their own business. They are passionate about their teaching and community involvement and this is where they want to invest their energies. On the other hand, their friend Hugh very definitely has a business bent (he just needs help in putting it to ethically productive uses!).
Different stages of life also often require a different approach to risk-taking. For example, with their growing family, Simon and Tarsha are understandably reluctant to avoid taking too many financial risks with their savings. They will soon have two young children who rely on them being able to provide the necessities. Things might be different in a few years time, but for now, retaining their savings is the priority.
Owning your own house
Another possibility Simon and Tarsha have considered is buying their own home. Technically, this is not really an investment – because there would be no financial return per se. However, in spite of this, and also of the concern of some economists that in many cities renting makes more financial sense than owning, home ownership is a very valid and healthy way for many people to save.
It provides stability for a family – a permanent home. Most importantly, in the case of standard mortgages which require regular payment of both interest and principal, it acts as a form of compulsory savings. Over a number of years, home owners can grow their equity in the property, simply by paying the mortgage! For a culture that struggles with regular savings, owning one’s house may be a very good way of enforcing a savings plan.
One of the concerns that Simon and Tarsha have regarding buying a house to live in, is their deep reticence to take on significant debt. They like the freedom of having money in the bank. However, in order to purchase something suitable close to where they currently live, they would need to take on a $300,000 mortgage. That’s a lot of debt.
Nonetheless, not all debt is equal. There is what we might call “good” debt and “bad” debt. Debt that is incurred on an asset – something that is likely to either retain or increase in value, over time – can be good, so long as the repayments are sustainable and we have not funded the whole asset through debt. Much housing tends to fit this category.
The kind of debt we must be careful to avoid is debt to fund either depreciating or consumable items, or speculative ventures. This is why when they next have to replace their car, Simon and Tarsha will avoid borrowing money. A car is not really an “investment” because its value depreciates. The couple have the good sense to know that this is one purchase they should not get into debt for. One of Simon’s mates took out finance on his new vehicle a couple of years ago and already owes more on it than the car is now worth. Such forms of debt become the very mechanism that entraps us.
Letting our investment decisions be shaped by our life direction
Simon and Tarsha have some challenging decisions to make. But they are in a good situation, having saved well through some relatively “cash-rich” years. What they ultimately decide to do needs to mesh well with where and how they sense God is asking them to live and serve.
You see, it’s tempting just to determine how we invest our savings without any reference to how we are also investing our time, gifts, and relationships. But the resources God entrusts us with are a whole package – and so how we invest our money needs to serve God’s call on our lives.
Next article: Retirement and Insurance
[1] By highlighting this I am not suggesting that we need to make a choice between loaning and buying.
[2] Many speculative ventures don’t actually create any real economic value, but just manipulate the market in order to make money. Short term share trading, foreign exchange trading, many “hedge funds”, trading in precious metals etc are all commonly accepted “investment strategies” with questionable validity. So too are many modern “financial products”.
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