SOURCE: This article was first published in a Wealth of Common Sense and has been reproduced here with permission from
I had a family member ask for some investment advice recently.
They had come into some money and wanted to know if I had any thoughts on what they should do with it. It would be easy to simply offer up a fund or handful of funds to invest in but there’s more nuance required when you have no idea why the person is investing in the first place.
I get asked these types of questions on a regular basis from friends, family members, and readers of this site. I wish I had an easy answer but offering investment advice can be complicated.
A number of questions come to mind anytime someone asks me where they should put their investment dollars:
- What’s your time horizon?
- When will you need to spend the money in the future?
- What’s the purpose of the money?
- What’s your current financial situation?
- What’s your appetite for risk on this investment?
- What’s your past history with the markets?
- How much do you know about the risk/reward relationship between stocks, bonds, cash, and other investments?
- How much are you willing to lose on this investment?
- Do you have an investment plan in place?
- How are your cash reserves?
- What are your expectations for return on investment?
- What is your current asset allocation and how does it align with your goals and risk profile?
- How diversified are your investments?
- Do you have a written policy statement?
- When would you sell this investment or rebalance a little out of it?
- How will you judge the performance?
- Do you typically invest using funds or individual securities?
- Which types of investments do you typically avoid?
- What is your overarching investment philosophy?
- What do you own and why do you own it?
- How much volatility are you comfortable with?
- Do you have any rules in place to guide your actions?
I could go on but you get the point.
Maybe this is overkill and I should just recommend a targetdate or balanced fund from Vanguard or another low-cost fund provider. But once you go down this rabbit hole you realize offering casual investing advice is not easy.
Anyone can make buy or sell recommendations, give you an optimized portfolio allocation, offer a quantitative investment strategy, or make market predictions. That’s the easy stuff. Anyone can give one-off advice about what to buy or sell because it doesn’t require any follow-through.
The hard stuff requires thoughtful consideration, research, and a deep understanding of person in question.
Even if a perfect investment strategy existed, it wouldn’t work if the person on the receiving end of that strategy didn’t understand what to expect from it and how to use it going forward. The true test of any investing advice comes after the recommendations are made and that person has to actually implement and live with the consequences.
This is why casual investing advice is often pointless because you don’t understand the end user and they don’t understand you. Most people are better off receiving long-term perspective over short-term tactics.
Ryan Holiday gave a working definition of the term perspective in his book Obstacle is the Way and it’s twofold:
Context: A sense of the larger picture of the world, not just what is immediately in front of us.
Framing: An individual’s unique way of looking at the world, a way that interprets events.
I like the idea that philosophy is universal, but strategy is personal when it comes to investing advice. In this example, context is the philosophy while framing is the strategy. Both of these concepts are important, just in different ways.
But to get to the strategy, you first must develop your philosophy. That could require answering some difficult questions that you’ve never thought about or put down on paper before.
Giving actionable advice is easy but giving lasting advice is not.
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