As investors, we are our own worst enemies. This observation stems not only from our decades of practical experience in the financial arena, but also is confirmed by Scripture. Given our fallen natures, it would be surprising if we weren’t the primary problem we face when investing!

Consider for a moment the kind of people we are: our wisdom is flawed (1 Corinthians 3:18-19); our motivations are impure (Jeremiah 17:9); our emotions can overpower us (Romans 7:18); and our vision into the future is limited (James 4:13-16).

As we renew our minds in God’s word, we can begin to put proper boundaries in place that not only define our Christian priorities and values but also will serve to protect us from the markets and ourselves. The reason for having an individualized investment strategy is to provide these needed boundaries.

Having a specific strategy (or blend of strategies) in place helps contain and focus your impulses by providing boundaries. It boxes you in and, yes, takes away your freedom to do what you might want. But it offers a new kind of freedom — the freedom to do what you should. It gives you a sense of perspective and a new way of knowing what’s “right” for you.

Here are four biblically based boundaries we believe will enhance your investment effectiveness:

  1. Objective, mechanical criteria for decision making
  2. A portfolio that is broadly diversified
  3. A long-term, get-rich-slow perspective
  4. A manager’s (rather than owner’s) mentality

Let’s look at how the first of these suggested boundaries can come into play in practical ways.

Mechanical guidelines

Mechanical guidelines require that you develop objective criteria to follow when making buying and selling decisions. One example of this would be using the risk matrix (found in the Start Here section of this site) to select a specific mix of stocks and fixed-income investments for an Upgrading portfolio. The suggested allocations provide explicit, objective boundaries to help you diversify according to your risk tolerance and age. They help make your investment decision-making purposeful.

Another example of using mechanical boundaries involves the way SMI’s Dynamic Asset Allocation strategy (DAA) shifts between asset classes. Rather than trying to discern how much of your portfolio should be invested in U.S. Stocks (or any of the other asset classes), you rely on the objective and time-tested process in DAA to make those determinations. This eliminates any “beliefs” you might have about what the market is likely to do next and puts your decision-making on a more reliable footing.

The type of mechanical decision-making that takes place in DAA can work in your favor by forcing you out of stocks after a long bull market (when the gains of recent years may make you reluctant to reduce your stock exposure), as well as by forcing you to get back into stocks after a bruising bear market. Many investors missed the big rebound in stocks from 2009-2013 because they were so battle-scarred from seeing stock prices cut in half during 2007-08. DAA would have forced investors back in early in the recovery, after limiting losses dramatically in the first place.

Mechanical guidelines can help you control your losses in other ways as well. When you buy a stock or fund that doesn’t perform as you hope, it can be difficult emotionally to admit it didn’t work out. People often hold on to weak companies for years hoping to sell when they can “get even.” This is a form of denial; the loss has already taken place. This emotional trap can be avoided by a mechanical guideline that says, “I’ll sell if it drops x% from where I bought it because if it gets that low, there’s a strong probability I misjudged the situation.”

Dollar-cost-averaging is a mechanical guideline that can help you know how much to invest and when. The discipline imposed by this program is helpful because most people’s judgment tends to be unduly influenced by current news events. There will always be bad news, but news is rarely as bad or good as it might first appear. These guidelines protect you from overreacting (along with everyone else) to the crisis or euphoria of the moment.

The markets go to extremes because they are driven by emotions, not reason. Also, professional money managers are afraid of getting left behind and looking bad (they want job security too, you know), so they go along with the crowd and panic like everyone else. Mechanical guidelines help you harness the powerful emotions that often cause investors to do precisely the wrong thing at precisely the wrong time. Mechanical rules may appear dull, but that’s actually a virtue — the most successful market strategies tend to be dull because they are measured, not spontaneous.


(Click Graphic to Enlarge)