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

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.

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I’ve decided to get back to basics, and rely on Kipling: (( The poet, not the cake man. ))

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. (( I’ve been using these since long before I knew of Kipling’s poem – indeed, one of many many childhood nicknames was WhoWhatWhenHowWhereWhy ))

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?

• Remember though, it’s usually best to Be a DIY Investor.

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

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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?

• You do have a long-term plan, don’t you? If not, see You Need A Plan.

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)?
  • At the same time – Don’t Buy Too Much Insurance.

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.

• Such people have three friends – low costs, low taxes and asset allocation.

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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?

I hope that you find these helpful.

• Good luck with all your future investments.

Until next time.