Questions to Ask Before You Invest in Anything – A Poet’s Advice

questions to ask before you invest in anything

Today’s post is about what questions to ask before you invest in anything.

How many questions?

If you look around the internet, you’ll see a lot of articles telling you which questions to ask before you invest in something.

  • Today’s article is my attempt to come up with a definitive list.

In this age of clickbait, most of the articles include a number in their title.

  • But they don’t agree on what that number should be.

Some suggest a single Big Question, others say five or seven or eight or ten.

  • This is very much “how long is a piece of string” – you can come up with as many questions as you want to.

But the more questions you have, the harder it is to make sense of them all.

  • And the less likely it is that you will remember to ask all of them.

I’ve decided to get back to basics, and rely on Kipling:1

I keep six honest serving-men
   (They taught me all I knew);
Their names are What and Why and When 
   And How and Where and Who.2

Apologies in advance for all the question marks below.

What

The big question here is:

  • Do I understand what I am investing in?

Could I explain it to someone else?

  • Particularly someone with less investment knowledge and experience than myself?

If I can’t, do I need to consult an independent advisor?

There are two common reasons for you not understanding an investment:

  1. The person explaining it doesn’t understand it either
  2. There’s something about the investment that the person is trying to hide

What are the expected returns?

  • What is the variability on these, and is the central value what I am looking for?

What about the risks?

  • How do these fit in with my own risk tolerance?
  • Am I comfortable taking these risks?

How do the risks and the returns match up?

  • Do they stack up, or is it Too Good To Be True?
  • Could I achieve the same return with something less risky?

What is the downside / worst-case scenario?

  • Between two similar investments with different downsides, the one with the smaller downside is probably the best option.

Could I lose some or all of my money?

  • Can I afford to lose some or all of my money?

How much does this thing cost (to buy / sell / hold)?

  • Are the charges reasonable?

Could I get the same thing / something very similar for less?

  • Remember, the lower the costs, the more likely you are to have good returns.

What is the tax treatment of this investment?

What is its track record?

  • This is much more important than any projections you might be presented with.
  • Look for a real track record rather than “back-testing”.

How does that compare to similar (and alternative) investments?

  • How does it compare to a relevant benchmark?
Why

Here the big question is:

  • Why do I need this?

How does it fit into my long-term plan?

See also:  Family Firms

Another version of the same question is:

  • How does this investment fit with my goals?
  • Are you looking for income, growth, security (or all of the above)?

And a third version is:

  • How does this fit with my current asset mix?

You should also be sure that you are ready to invest:

  • Have I paid off my debts (other than mortgage debt)?
  • Do I have an emergency fund?
  • Have I got all the insurance I need (life assurance, income protection etc)?

Another way of looking at this – for more active investors, at least – could be:

  • What is my edge?
  • What reason do I have for thinking that I will come out ahead on this investment?

For most people, and most investments, there will be no edge.


The bottom line is:

  • Do I need this investment?
  • Is my current plan “good enough” already?

Are there better things that I could do with my money:

  • pay down debt (including mortgage debt)
  • workplace pension
  • SIPP
  • ISA, etc.
When

The big question here is:

  • When will I get my money back?

Is this when I need it back?

  • Or do I need it sooner?

This is about liquidity.

  • Can you access your money before the standard term is up?
  • Or is your money locked away for the full term?

If you can access the cash, do you get back all of it, or is there a penalty for early withdrawal?

  • Perhaps your investment is listed on an exchange, and priced in real-time (while the exchange is open).
  • Then your only penalty for early withdrawal would be the trading spread and selling commissions.
How

This is another version of the what question:

  • Do I understand how this works?

You could refocus that down to:

  • How is my money being used (invested)?

Or spin it around and look at what to do if things go wrong:

  • How do I complain about this product (and to whom)?
  • How is this product regulated?
Where

The obvious question is “where is my money invested?” but I prefer:

  • Where do I go to for help?

Is there a regulator or ombudsman?

  • Is there an industry association with a website where I can find out more about this product?
Who

The big question this time is:

  • Who is promoting this investment to me?

Most importantly, what is is their motivation?

  • How are they getting paid?

Also, are they qualified and / or regulated?

  • Are they authorised to offer this kind of investment?
  • Note this doesn’t mean that I’m a big fan of UK finance industry qualifications.

Perhaps most importantly:

  • How much do they know about you, and your financial situation and goals?
Conclusions

There are hundreds of questions that you could ask about an investment.

  • But to be useful, you need a short list that you can remember to ask.

I’ve decided to go with six big questions from Kipling:

  1. Do I know what I’m investing in
  2. Do I understand how this works?
  3. Why do I need this?
  4. When will I get my money back?
  5. Where do I go to for help?
  6. Who is promoting this investment to me?
See also:  Starting an Investment Club

I hope that you find these helpful.

  • Good luck with all your future investments.

Until next time.

  1. The poet, not the cake man. []
  2. I’ve been using these since long before I knew of Kipling’s poem – indeed, one of many many childhood nicknames was WhoWhatWhenHowWhereWhy []

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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2 Responses

  1. Thank you! This is such a good, detailed post. Very helpful.

  2. Sam says:

    Hi Mike, good post thanks. A lot of fundamentals here that beginners are only too happy to bypass, usually sets them up for defeat

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