Three Questions Every Investor Should Be Able To Answer

Here are three questions every investor should be able to answer. Responses may vary as money decisions are often personal. Increasing your knowledge allows investments and cash to integrate so better life decisions can be made.

What exactly do I own from an investment perspective?

Answering this question in as few words as possible is encouraging. Every investor should have an awareness of where their dollars are placed. Why? Knowing what you own and understanding the risks and volatility of your choices keeps you from being surprised. Surprises arrive when we least expect them and can lead to reactions.

February to March 2020 and January to October 2022 tested investors’ patience as portfolios zigged and zagged. Navigating through, around, and over environments with high levels of uncertainty is not easy.

Knowing what you own and the why behind each investment can reduce the need to check your accounts often. This creates time that can be directed to other fruitful activities. Investment results this week, quarter, and year become less relevant when a clear purpose exists.

Without a roadmap, investors may fall into a doom loop of chasing more by never quantifying enough. This lack of direction creates a crack where worry, anxiousness, and fear can sneak in and take over your thinking. This is completely avoidable by updating your plan and periodically checking in with your planner.

You shouldn’t need advanced degrees to articulate your investments. Ideally, you can explain your strategy to your kids or a close friend with the message being clearly received. Simplicity is the ultimate sophistication.

My response, if asked, would be our family owns thousands of businesses that are in a constant state of expansion and contraction. We’re not looking to make a killing, or get killed, so we own these companies via several efficient exchange traded funds. That’s it.

What percentage of investments include owning versus lending money to companies?

I’ve written on the differences between owning and lending to companies. As an optimist, I see the glass as half full and believe a good offense is owning diverse businesses here in the US and abroad. A defensive posture would be lending your monies to companies seeking current yields and return of principal at some future date.

As I reflect on our family’s time horizon, it becomes clear that income will be necessary for decades. Our financial plan reminds us that sustainable spending is really the only thing that matters. The plan identifies what investment choices make sense with this in mind. It’s not the market or economic trends that determine investment selection. Instead, it’s the need for a relevant income my wife and I can’t outlive.

What’s the process to liquidate investments so cash reserves may be refilled?

Refilling cash reserves is easy while earning an income, more of a challenge when that income stops. A lack of reserves is what trips up most investors. It will be necessary to routinely sell investments at some point to maintain the right liquidity levels.

It’s less than ideal to sell when prices are contracting which leads to a reactive posture. Following a process to refill cash can be tricky if the right habits aren’t in place.

Should you liquidate from pretax IRAs, Roths, or from the after-tax portfolio? Should company stock be sold or is that premature? What are the tax considerations and tradeoffs when generating cash? How many liquidations are necessary each year? The list of questions can be extensive.

Taxes shouldn’t be ignored and must be integrated into a refilling strategy. This meets cash reserves and allows the remaining investments to stay invested and do their thing. Compounding is a wonderful thing when it’s not interrupted.

If you’re having difficulty answering these questions, you’re not alone. Having a friend to reach out to may be valuable and increase your confidence. That’s our job and what we do. Helping investors personalize what it takes to save, invest, and spend. Go live your life with purpose without having to think about money all the time.

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