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Parable of the Talents

In this well-known parable, three servants were entrusted a certain amount of wealth while the master went away for a period of time. The first two servants had invested and doubled what they were given. As a result, the master said to them, “Well done, good and faithful servant…Enter into the joy of your master.” (Matthew 25:21, English Standard Version Bible, 2001). The third servant, being afraid from the risk of investments, buried his talents in the ground, for which the master scolded him, “You wicked and slothful servant!”, then proceeded to kick him out of his sight. (Matthew 25:26, English Standard Version Bible, 2001).

Each of us are given possessions to be managed on behalf of God’s will. We ought to learn from the examples of the first two servants and avoid the mistakes made by the third. In the end, we will be accountable for how we have handled what we were given in this world. This highlights the importance of learning and understanding the different investment instruments and classes.

Money Market Instruments

Money market instruments are composed of very short-term debt securities. Some examples include certificates of deposit, commercial paper, and banker’s acceptances. Overall, money market instruments are considered very low risk investments with almost guaranteed rates of return. The U.S. treasury bills, for example, are “the most marketable of all money market instruments” (Bodie, 2022). This is because the debt obligation is backed by the U.S. government and the only way T bills will go bad is if the government defaults.

Fixed-Income/Bond Instruments

The bond market consists of options such as municipal bonds, corporate bonds, and mortgage-backed securities. One advantage of bond instruments such as municipal bonds is special tax exemptions. Interest payments on these bonds are exempt from income taxes. One major consideration when choosing to invest in bonds is opportunity cost. Since bonds are generally required to be held for a predetermined period of time, investors could lose out on returns when better investment opportunities show up.

Equity Investments

Equity markets include common and preferred stocks. Buying a stock means taking a portion of a company’s ownership. Depending on the stock, some stocks pay out regular dividends to their stockholders. Besides monetary ownership, stockholders also gain a voice in the company and are entitled to votes “on matters of corporate governance” (Bodie, 2022).

Mutual Funds

Mutual funds are a collective of stocks that are included in an index such as the S&P 500. There is the constant debate in the investment world comparing passive investing to active investing. According to an article published in the Financial Analysts Journal, “a number of studies have all concluded that the average actively managed fund loses to a low-cost index fund, net of all fees and expenses” (Petajisto, 2013). Therefore, it may be wise to invest in a broad index such as the S&P 500 instead of an actively managed fund when picking a mutual fund to invest in. An alternative to index funds is the exchange-traded fund, which is a collection of stocks that can be bought or sold like a single stock. Although a mutual fund is considered a “low-cost passive investment strategy for equity investors” (Bodie, 2022).

Derivative/Option Investments

Derivative markets consist of futures and forwards, as well as swaps. Two most popular options are the call option and the put option. A call option grants the holder the ability to purchase an asset for a specified price before the option expires. In contrast, a put option gives the holder the ability to “sell an asset for a specified exercise price on or before a specified expiration date” (Bodie, 2022).

Risk and Return

From the parable above, we learned that some risk taking is necessary to reap returns. According to one study, people generally “perceived those easier-to-understand products as less risky, which was likely driven by the familiarity bias” (Wang, et al., 2011). We must not fall into the faulty mentality that caused the demise of the third servant. The master was right about the third servant being slothful. It takes minimal work to bury the talents in the ground. It takes work to learn about the different investment options picking the most appropriate investment portfolio.