“What’s the purpose?” is one of the most important questions we can ask in life. To this central subject, the Bible provides the answers for us . . . in Matthew 22:37, Jesus says that “the great and first commandment” is “You shall love the Lord your God with all your heart and with all your soul and with all your mind.” In Ephesians 2:10, we see that “For we are his workmanship, created in Christ Jesus for good works”. While as to what is required of us, Micah 6:8 instructs “but to do justice, and to love kindness, and to walk humbly with your God?”.
On this question of purpose, Pastor Rick Warren has taught and written extensively on the importance of living a “purpose-driven life”. His best-selling book, The Purpose Driven Life, has sold 32 million copies and been translated into 85 different languages. Millions of lives have been impacted as they have come to more fully understand their life’s purpose in relationship with God. Knowing our purpose is everything.
Just as the question of “What’s the purpose?” is imperative for our life’s journey, it is also critical to our investment journey as well. When investing, there are many important, sensible questions for investors to consider, incl. “What’s the state of the economy?”, “What are the prospects for growth?”, “Is inflation a significant risk?”, “How do valuation levels look?”, “What about global trade?”, “Will the Central Bank be adjusting monetary conditions?”, etc. However, the first and most important question investors need to ask themselves is “What’s the purpose of the investment?”.
Over the course of my career, the biggest mistake I have seen investors make is by not first asking themselves “What’s the purpose of the investment?”. By not asking that question first, oftentimes investors will miscalibrate their investment strategy with their financial objective(s). If the purpose of the investment is for a short term (less than five years) goal such as a planned major purchase or expenditure, then a lower risk strategy, maybe even a “savings” strategy rather than an “investment” strategy is likely the best course of action. However, for those financial goals that are long-term (more than five years) such as young children’s college funds, retirement, a vacation home, estate plans, charitable bequests, etc. a longer term investment strategy is prudent. The other questions about the economic, market, and political environment while important, are all secondary to primary question of the purpose of the investment. Too often, investors make the mistake of focusing their attention on the prospects for the coming days, weeks, and months while their financial goals are oftentimes measured in years, decades, and even generations. This disconnect can lead to dire outcomes.
Knowing our purpose is very important as we go through life. Regularly recalling that purpose can help to guard us against the idols, distractions, and temptations of this world that call out to us every day. Likewise, knowing the purpose of our investments can help to keep us from the behavioral traps and temptations that afflict all investors to one degree or another. Knowing purpose is foundational to faith as well as to investing.
Dr. Erik Davidson, CFA, is the Chief Economic Advisor for Inspire Investing. Previously, Dr. Davidson served as the Chief Investment Officer for Wells Fargo Private Bank, overseeing more than $200B in assets. Dr. Davidson holds a doctorate degree from the DePaul University’s Kellstadt Graduate School of Business with his research focus in Behavioral Finance.
