Regardless of your attitude toward risk, the key to investing successfully may be in moderating your risk.

Outside the world of finance professionals, many people fall into one of two categories of nave investors: those who do nothing out of fear of the unknown and those who view their navet as a sort of an investing “competitive advantage.”

There is another group comprising both members of our faith and those of other faiths, that I will largely ignore, who believe the second coming is imminent, along with the apocalyptic events foretold in scripture and who, as a result, invest much of their savings in guns, ammunition and gold. To this group, I would offer President Monson’s optimistic adieu in April 2009-at the bottom of the recession: “My beloved brothers and sisters, fear not. Be of good cheer. The future is as bright as your faith.”[i]

“Fear not”

Those who tend to do little or nothing out of fear of the unknown should take heart. Retirement will be much more pleasant and will offer much more opportunity for church service for those who have prepared well.   Please allow me to offer a simple three point plan to help get you started.

First, if you haven’t started saving, start saving now. And by “now,” I mean right now. Go to the bank, move some cash from your checking account or take some pocket change from your wallet and open a savings account. If you have a job, be sure to take advantage of whatever retirement savings program may be offered by your employer-too many people pass up the simplicity and power of the 401(k) programs offered by their employers. If you are unsure about what is offered, ask your human resources department today. Most companies offer a match of some sort, meaning that they will contribute more money to your 401(k) if you do.

Second, seek to shield your investment earnings from taxes using your 401(k) and/or an IRA (Individual Retirement Arrangement). All such accounts protect your earnings from tax until retirement. Some offer a tax deduction now (making contributions easier) while subjecting you to taxes when you withdraw the money during retirement. Those that do not, “Roth” accounts, allow you to earn investment returns tax free for the rest of your life-you never have to pay tax on the gains. May I suggest that you not get overly concerned about which type of account to open; the most important thing is to begin putting money away in a tax protected account right away!

Third, with the help of a qualified professional, put your investments to work using stocks and bonds. This can easily be accomplished using mutual funds, professionally managed pools of money invested in stocks and/or bonds. Stocks represent ownership shares in companies. Hence, owning a share of General Motors makes you a part owner of General Motors (owning one share won’t likely get you a discount on a car, however.) Bonds are promissory notes or loans. As an investor, you can become the lender! You can lend money to companies, cities, states or even the federal government. All of these investments have risks. You will lose money sometimes. I promise. Prudently invested over the long haul, however, you should be able to create a portfolio that will generate higher returns than you can earn on your savings account in the bank, allowing you to have a more comfortable retirement.

For The Daredevils:

For our daredevil investors who may think that they have Wall Street figured out, despite lacking any formal training in finance, please consider a word or two of caution. Academics agreed a generation ago on a principle known as the “Efficient Market Hypothesis” or EMH.[ii] The EMH basically says that there is no way to beat the market.

There are thousands of well-trained people using proprietary systems, some that execute thousands of transactions per second, who are trying every day to find a way to disprove the EMH. Whenever a money manager earns a return in excess of broad market returns, that manager is prone to brag that he’s done it. Very few ever do it with any amount of money and fewer still do it consistently.

Actually, results in the market tend to prove rather than disprove the EMH. So few people beat the market consistently that it corresponds roughly to the number you’d expect would beat the market if everyone invested randomly. You see, if everyone did invest randomly rather than according to their “proprietary investment strategies,” some would beat the market purely by chance. If they all were to continue investing randomly, some would beat the market again. One or two-of the thousands and thousands of professional money managers-would even do it year after year purely at random.

The lesson: you are unlikely to beat the market without taking risks you don’t understand or know how to measure. Rather than try to beat the market, use a carefully selected portfolio or portfolio of mutual funds that will deliver a return that corresponds to the market. If you are young and affluent, you may be willing to accept more than market risk in hopes of greater than market returns (associated with greater than market risk of loss). As you age, you are likely to want to shift your portfolio to accept lower than market risks in hopes of achieving consistent, modest returns. A good financial advisor can help you choose investments that work together to reduce (or expand, if you want) the risk (and, we expect, the returns) in your portfolio.

The worst of all investment follies is day-trading. Thankfully, this business is fading somewhat from our broader culture and is being left largely to those who are well-trained and equipped. A few die-hards remain among the relatively untrained and ill-equipped. Some attempt to earn a living by trading portfolios as small as $25,000. Day trading is the financial equivalent of playing roulette in a casino. (I only know this from reading about it.) In roulette, a player can choose red or black with apparently 50/50 odds of winning-except that a few spots on the wheel are neither red nor black, but green-the house.[iii] Short term trades have almost exactly a 50/50 chance of winning, but commissions and other trading costs effectively reduce the odds.

Stock commissions are extremely low compared to twenty years ago, so it is tempting to ignore them. For day traders, however, they remain a big factor. Day traders often seek to place several $25,000 trades in a single day. A commission of $10 on a trade of $25,000 doesn’t seem that bad as it is just a fraction of 1% of the value of the trade. Remember, however, that each trade must be entered and closed, meaning that there are two commissions for each trade. Furthermore, the gain or loss on each trade tends to be less than $1,000-sometimes less than $100. When the gain or loss is only $100 with $20 of commissions, you see that the commissions represent 20% of the gain or loss. If gains and losses perfectly offset, as we’d expect for very short term trades, commissions become the central problem. As long as commissions are non-zero, the long-term expected value of a short term trading strategy will remain negative. In other words, day trading is for Wall Street professionals and suckers.

It has been noted over the years that a fair proportion of billionaires in the world have made fortunes in the world of finance. That observation often leads us to believe that we all have that potential if we invest well. The fact is, that people who make fortunes on Wall Street or elsewhere in the world of finance, do so not by managing their own money remarkably well, but by managing other people’s money for handsome fees. In order to attract large amounts of other people’s money, they completed years of advanced education, technical training and licensing by regulators. If you find yourself dreaming of making it rich by investing a portion of your modest wages, you are certain to be disappointed.

Harmonizing Dissonance

The counsel offered to those who are frozen by fear and to the financial daredevils among us seems to be directly opposite, on the one hand, “take heart,” and on the other hand, “be afraid, be very afraid.” In fact, the counsel is exactly the same. Invest cautiously for the long haul. Diversify your portfolio. Use retirement accounts to protect your savings from taxes. Seek counsel from prudent, licensed advisors. Accept risk appropriate to your circumstances. Don’t gamble with your savings.


Devin D. Thorpe, author of Building Wealth for Building the Kingdom: A Financial Planning Guide for Latter-day Saint Families and Your Mark On The World, Stories that show us how to give more with a purpose without giving up what’s most importantrecently returned from China where he served as a business professor at South China University of Technology in Guangzhou for BYU’s Kennedy Center.  He also writes blogs titled Building Wealth for Building the Kingdom and Your Mark On The World.  Previously, he served as the CFO for MonaVie.  Prior experience includes running the investment banking firm Thorpe Capital Group, LLC, leading the residential mortgage firm Mortgage America, LLC and serving on the U.S. Senate Banking Committee Staff.  He earned an MBA from Cornell University and a BS in Finance from the University of Utah.


[i]               Thomas S. Monson, “Be of Good Cheer,” General Conference, April 2009.

[ii]              “Efficient Market Hypothesis,” Wikipedia.

[iii]              “Roulette,” Wikipedia.