BUSI 538 Week 3 Discussion Board 1: Main Post Example

Discussion Board 1: The Parable of the Talents and the Five Types of Investments

BUSI 538 Investments and Derivatives, Discussion Board 1: Main Post

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The thread answers the forum topic printed in Liberty's public course guide for BUSI 538; the textbook, research and Scripture cited are real, and the return figures are those the studies report.

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Before leaving on a long trip, the master in Jesus's parable hands his servants five talents, two talents and one talent. The first two trade with the money and double it; the third buries his talent because he is afraid. The master calls the first two good and faithful and rebukes the third, adding that he should at least have deposited the money with the bankers so that it would have earned interest (English Standard Version Bible, 2001/2016, Matthew 25:14-30). The servant's fault was not caution. It was putting the master's resources where they could produce nothing at all. That reading frames the five types of investments.

Money market instruments, such as Treasury bills, commercial paper and money market funds, are the bankers' deposit of our day: short-term, highly liquid and nearly free of default and price risk (Bodie et al., 2017). Their return is modest, and after inflation it has often been close to zero, so they suit money needed soon, not long-term goals. An emergency fund belongs here, as does cash set aside for a known expense within a year, because for those purposes certainty of principal matters more than return. Holding a retirement account in money market funds for decades, however, repeats the third servant's mistake in a more respectable form. Fixed-income instruments pay contractual interest and principal. Their risks are interest rate risk, which grows with maturity, and default risk, which grows as credit quality falls; investors who accept more of either expect a higher yield. Equities give owners a residual claim on a company's profits. Their returns are far more volatile, but over long periods investors have earned a substantial premium over bonds for bearing that risk, which makes stocks appropriate for investors with long horizons and the tolerance to ride out losses.

Mutual funds pool investors' money into diversified portfolios, reducing the risk of any single security. Their main drawback is cost. When Carhart (1997) looked for funds that kept outperforming, the apparent winners turned out to be riding common market factors, while fees and trading costs explained much of the gap at the bottom; the only reliable persistence belonged to the worst funds. A low-cost diversified fund is therefore often the wisest way for an individual to hold equities. Options give the right to buy or sell an asset at a set price; buyers risk losing the entire premium, while writers of uncovered options can face very large losses (Bodie et al., 2017). Used as insurance, such as a protective put, options reduce risk; used for speculation, they concentrate it.

Higher risk raises expected return, but behavior can erase the gain. In the brokerage accounts of some 66,000 households, Barber and Odean (2000) found that the most frequent traders trailed the market badly once costs were counted, a shortfall they traced to overconfidence. The parable rewards faithful use of entrusted resources, not reckless use; the servants who doubled their money traded with diligence, not with abandon. For investors, faithfulness means matching each asset to its purpose and to the investor's capacity for risk, avoiding both the buried talent of idle cash and the gamble of speculation.

References

Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773-806. https://doi.org/10.1111/0022-1082.00226

Bodie, Z., Kane, A., & Marcus, A. J. (2017). Essentials of investments (10th ed.). McGraw-Hill Education.

Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57-82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x

English Standard Version Bible. (2016). Crossway. (Original work published 2001)