One of my favorite stories growing up in Catholic school was the parable of the talents in the Gospel of Matthew. It wasn’t until much later I would realize its true significance and the message sent to investors and financial advisors alike. As it turns out, there is also a slight difference in the Hebrew version of the parable with additional wisdom on how wealth can impact people’s behavior.
The story is about a master who before leaving for a long period of travel entrusts three of his servants to manage his property. The servants are given “talents” – an ancient measure of mass that was used to describe a fairly substantial amount of a precious metal. A talent meant different things across regions, but in any case, it was a lot of money.
The first two servants invested the amounts entrusted to them and by the time the master returned had doubled what they were originally given.
The third servant, however, was nervous about losing the money he was given and buried it in the ground. Naturally, at the end of the period, he only has the original amount he was given to show for it.
When the master returns, he is thrilled with the efforts of the first two servants. He praises their efforts and bestows even more wealth upon them. The third is scolded and thrown into outer darkness “where there will be weeping and gnashing of teeth” - don’t you love when the Bible gets all warm and fuzzy!
Playing it Safe Means 0 Growth in Wealth
There is a profound lesson for investors about risk and return in this parable.
Often when investors have even a small amount of wealth, they are so afraid of losing it they more or less bury their money in the ground instead of investing it to grow their wealth.
They are rewarded, like the conservative servant, with zero growth in their wealth over time.
In the modern world this is still a path toward being thrown into darkness, as the purchasing power of their wealth is slowly stripped away by inflation.
This is why it is essential that people who are preparing for retirement and will ultimately rely on their investments to have at least a portion of their wealth allocated to a diversified stock portfolio. Retirees need at least a portion of their wealth to experience the compound growth provided by stocks to fund their lifestyle in a rising cost word.
Wealth will accumulate in the hands of people who invest
I mentioned there was a Hebrew version of the story I prefer to the version I heard growing up because I think it teaches even more important lessons about wealth.
Much like the story in the gospel of Matthew, the first servant is given 5 talents, the second servant is given 2, and the third is given 1.
But only the second servant invests the money in this version. The third servant buries the money and the first servant, who was given 5 talents, wastes the money on trivial things. It is this misbehaving first servant that is thrown into the darkness.
There is a lesson here that I think is so intuitive it was observed by people in biblical times: wealth tends to accumulate in the hands of people who save and invest, slips from the hands of frivolous spenders, and never finds its way to overly conservative investors.
People who spend frivolously will find their wealth decreasing over time – their wealth will be taken from them like the first servant in the Hebrew version. Those who are too afraid to invest stand still (which many versions of the story imply is a bad thing) while those who invest grow their wealth over time and prosper.
The story also seems to point out the people most likely to fall victim to these different types of behaviors. The people most likely to spend frivolously and lose their money are people who were given a lot of wealth to begin with. They start with the most wealth, but that doesn’t mean it can’t be squandered quickly.
On the other end of the spectrum, people with the smallest amount of wealth – who you would think would be the most eager to invest and grow their wealth, are often the people who play it too safe at the expense of growing their wealth.
A lesson for Financial Advisors
“You have been faithful over a little; I will set you over much.”
As financial advisors we are entrusted with client wealth as the servants are with the master’s talents in the story. It is our job to employ it in a way that actually benefits them. Often, that means educating clients about the cost of being too conservative and the reasons to take risk to grow their wealth, or letting them know the impact of overspending or under-saving.
Like the servants in the story, advisors who act as faithful stewards of their client money are rewarded with more clients and more wealth to manage.
True Wisdom Stands the Test of Time
I can’t help but think how relevant the lessons from this story are today.
In a world where people live long enough to retire for two or three decades – growing wealth is not just an added bonus, but completely essential. Perhaps it was as well for the pre-flood patriarchs in the Old Testament who were said to have lived to over 900 years – talk about longevity risk!
Those who do not employ their capital or erode it through frivolous spending will be thrown into financial darkness over time, as inflation or their own spending strips away their wealth. Those who invest will be rewarded with significant growth in their wealth over time.
Paul R. Ruedi, CFP® is a financial advisor at Ruedi Wealth Management in Plano, Texas.
Paul has been cited in news publications including The New York Times, Dallas Morning News, Forbes, Inc.com, Business Insider, US News and World Report, GoBankingRates, The Street, and NerdWallet. He also writes articles that have been featured in CNBC, Investopedia, Yahoo Finance, Nasdaq, and MSN Money. He was named one of Investopedia's Top 100 Most Influential Financial Advisors in 2018.