Making the right decisions on where you invest takes a process.  It requires goal clarification, evaluating risk and reward, understanding cashflows and liquidity, having a known time horizon, and of course taxes.  Asking yourself four fundamental questions before you part with your cash and invest supports better decision making.

  1. What is the purpose of this investment?
  2. What are the financial costs?
  3. What are the costs on your time?
  4. What is your exit strategy?

One of the guiding tenets of our planning practice includes asking clients to put a job description and purpose around each of their accounts and investments.  Calling a timeout and reflecting on why you own what you own and the purpose it serves is a valuable exercise.  This clarification and goal setting process allows you to link your investments to your priorities.  Goals and priorities first, then investments to support what you want second.  Most have this process backwards.  Often its discovered that what is owned is an outcome of random purchases overtime with no focus or clarity.  When you start with goals and work down towards your investments it becomes clear when a disconnect is present.

Outcomes that investments generate are largely out of your control.  What is in your control is the type of investments you select.  Will it support the purpose it was intended for?  If not, what changes need to be made, not to your goals, but rather to the investment you select?

Every investment has a financial cost, where will the cash come from to invest?  Cash reserves, cash flow, or a combination of both?  It’s important to have your cash reserves established first before you begin to direct monies to your investment.  Without addressing reserves, you may find yourself reacting and needing to liquidate what you invested in an inopportune time.  This reacting does not support better decisions.  Your investments do best when they may compound uninterrupted.  Getting the right dollars in the right account makes a difference.

How much of your time is necessary to manage your investments?  I’ve found most investors would rather spend their time with family and friends or doing a hobby they enjoy.  How much time, record keeping, and reporting is necessary on your behalf?  What would the impact be to ignore your investments and delegate your time to another activity?  Having control of your time and where you choose to spend it often leads to increased happiness.  Something to consider before selecting an investment.

When is the right time to liquidate your investment?  Is a liquidation even necessary for you to capture your gains?  What tax impact will this have on your other income?  How does timing determine when you should or need to exit your investment?  Answering these questions before you proceed to invest will raise your awareness on the full lifecycle of your investment.  Without quantifying an exit strategy before investing, you may lean on emotions or market timing to dictate when you should sell.  This tends to generate conflicts and outcomes that are suboptimal.

Setting aside time in advance to think through these questions may allow you to focus and make better decisions.  It’s completely acceptable to slow down and create a decision matrix to ensure your investment will serve the purpose you intend it to.

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