Should I invest in the stock market?
Should I invest in crypto?
Should I use Robinhood?
Should I keep my money as cash?
When you start thinking about investing your money, these are The Wrong Questions.
These are all tactics. Some might rise to the level of “strategy.” But to a one, they are not where you should begin your thinking.
The Forever Most Important Question in Investing
The most important question in investing, the question that you should regularly come back to, every time you make an investment choice, is:
What is this money for?
It doesn’t surprise me in the least that clients start with the tactical questions. Tactical answers are what grab your attention. They’re what’s debated in your Slack channels at work. They’re the titles of online articles. So you might reasonably begin to believe that these are, in fact, the questions you need to answer in order to invest your money.
And eventually you will answer them. But relatively speaking, they’re unimportant. Once you answer the question, “What is this money for?” then most of the important investing questions are practically answered for you.
An easy example: “This money is so I can buy a home in the next couple of years. How should I invest this money?” You shouldn’t. That’s a very short time frame, and if you indeed need that money some time in the next couple years, keep it as cash. Anything other than cash (equivalent) risks losing some of it.
So, that’s an easy answer. But it was easy only because we first identified what the money was for.
It turns out that, for the most part, investing is faaaaaaar simpler than we think. Faaaaaar simpler than what the knuckleheads on CNBC or your Slack channel make it out to be. It’s the context around the investing, which is to say, it’s your life that is complicated. If you can figure out your life, then investing for it becomes a bit more like falling off a log.
Questions to Ask (and Answer!) When Evaluating a Specific Investment
Still, you do eventually have to choose the specific investment “vehicles” to put your money in. Stocks? CDs? Bitcoin? Degas paintings? Rental real estate? Which one is best?!
Even as a financial planner, I don’t know everything about every kind of investment out there. (And honestly, I probably know enough about a very small portion of the total investing world.) And I have to say that not infrequently to clients who come asking about this specific investment or another.
There is a list of questions, however, that can—and should—be applied to all investments in order to understand whether it’s right for you. There’s no right or wrong answer to these questions in an abstract sense. There’s only right or wrong for your specific investment needs.
How liquid is this investment?
How easily can you get your money out of this investment? How easily can you turn the investment into grocery money?
Bank accounts are the ultimate in liquidity. You can get your cash out Right Now. Regular ol’ broad market index funds or ETFs or mutual funds…these are also very liquid. You might need to wait a day or so to access the money, but you can turn it into groceries real quick like.
By contrast, real estate is not liquid. If you need to turn a house into grocery money, it’s either going to be weeks or months while you try to sell it, or maybe you can use, say, a reverse mortgage or HELOC to get out some money, but that takes a while to set up.
There are many investments out there where you cannot access your money for years. Private REITs are one, formerly very popular, example. Collectible art. Some of the more thinly traded cryptocurrencies, I imagine.
What is the risk of loss? Under what circumstances will this investment lose value? How much should you expect it to lose?
How much value can it lose? All of it?
For example, the US stock market can definitely lose value. But as long as the United States continues to exist with a quasi-capitalist economy, the stock market isn’t losing all its value. (That would be the ol’ “bottled water and guns; we’ve got bigger problems” scenario.) In the long history of the stock market, even when it’s fallen 89% (in 1929), it has not lost all its value, and of course eventually recovered.
Cash, again, doesn’t lose (nominal) value. That $1 will always be $1. (It loses spending power, of course, as inflation has its way.)
Let’s say you want to invest in a rental property. How much could you possibly lose in that investment? (This is not the time for rosy optimism. This is supposed to be a hard-eyed look at the possibilities.) Under what circumstances could you lose that money?
What is the opportunity for gain? Under what circumstances will this investment make money? How much should you expect it to gain?
If you want to buy Tesla stock, do you know what would make the stock gain in value? Is it some change in the business’s objective financial condition? Is it Elon Musk’s tweet of a certain flavor? Is it the relationship Musk has with the SEC? I personally have no clue. I don’t invest in Tesla stock (except, of course, by way of a total market index fund that has owned Tesla for years now).
Cash has no opportunity for gain. Especially nowadays. The best you’re ever going to get is the current interest rate.
How much does it cost to own this investment?
How much does it cost to own this investment? For the kinds of investments we use with our clients—low-cost broad market index funds—the cost is the expense ratio of usually < 0.10% per year.
To take the extreme opposite end of the spectrum, if you’re a wine collector, you have to have a special temperature- and humidity-controlled cellar and refrigerators and yada yada yada (I really don’t know the half of it). That is an expensive investment to simply own.
Cost is the single best predictor of long-term performance of an investment: low costs lead to better performance. And it’s one of the few things we can actually control in an investment.
How transparent is the market?
How easy is it for you—or anyone—to get information about how the market for this investment works? The US stock market is tremendously transparent: everyone can see at any moment of the day what price any stock or fund is selling for.
By contrast, the real estate market is pretty opaque. Sure, we can look on Zillow for a guess at the home’s price, but we don’t actually know how much it’s worth until the moment it’s sold. Collectible art is another example of an opaque market.
If the market is opaque, how will you make well-informed decisions about buying and selling the investment?
If you cannot answer these questions, it’s simple: you shouldn’t put your money in that investment. If you can answer the questions, then maybe. But only if the answers to these questions are a good match for that first, and most important, of questions:
What is this money for?
Do you want to work with a financial planner who can help bring you—over and over again—back to what really matters? Schedule a free consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.