As one expert said to me, “deciding where to invest your money is the cornerstone of your financial plan.”

When it comes to knowing where to invest, the answer is highly individualized. There’s no one size fits all.

To discover where to invest, you must understand your situation. The best way to do that is to start asking yourself good questions.

What questions should you be asking? Or equally important for some, what questions should your financial adviser be asking?

While I have my own process, I wanted to learn the questions of other financial planning professionals.

So, I reached out to a group of highly respected, financial pros to ask this one important question:

When you’re deciding where to invest, what are the most helpful 1 to 3 questions to ask?

This group of professionals made up of CFPs™, an Economist and Professor, Portfolio Managers and authoritative bloggers blew me away.

I gathered a ton of value from their replies.

Every response was well thought out and extremely helpful for both the beginner and advanced investor.

Read on to discover each expert’s favorite questions, with some additional insight from many.

Below is the list of contributors. 

  • Adam Posen – President of the Peterson Institute for International Economics
  • Aswath Damodaran – Professor of Finance at the Stern School of Business at New York University & Author of  Musings on Markets
  • Ben Reynolds – Sure Dividend
  • David Merkel CFA – Aleph Blog
  • Jim Blankenship CFP™ –  Blankenship Financial Planning
  • Jim Wang –  WalletHacks
  • John Szramiak – Vintage Value Investing
  • Lance Roberts – Clarity Financial
  • Michael Kitces – Nerd’s Eye View
  • Mike Piper – Oblivious Investor
  • Neal Frankle CFP™ – Credit Pilgrim
  • Steve Burns – New Trader U
  • Tadas Viskanta – Abnormal Returns
  • Victor Ricciardi – Author of Investor Behavior

Adam Posen | President of the Peterson Institute for International Economics

Adam Posen Where To Invest Your Money

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Aswath Damodaran | Professor of Finance at the Stern School of Business at New York University & Author of  Musings on Markets

  • aswathHow much risk do you feel comfortable taking?
  • What are your liquidity (cash) needs?
  • How much income do you make?

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Ben Reynolds | Sure Dividend

Deciding where to invest is the cornerstone of your investment plan.  Asset allocation is critical in determining long-term total returns.  Successful investing depends upon having a long-term view.

That’s because as individual investors we cannot compete (profitably) with quant hedge funds in short-term trading.  In the medium term (quarterly time frame), you compete against an army of ivy league educated financial professionals who do this full time.  Again, competition is fierce.

This just leaves long-term investing.  Professional investors are graded on quarterly performance.  If a fund does poorly for a few months it can see serious outflows.  Investing for the long-run is a less crowded space.  You have fewer competitors – and a greater chance of success.

“The single greatest edge an investor can have is a long-term orientation.”
– Seth Klarman

With this in mind, the most important questions you can ask yourself are:

1.  How long is my investing time frame?
2.  Do I have the ability to buy when others are selling?
3.  Can I hold onto great businesses when their stock prices are falling?

If you have a long time frame (10+ years), the ability to buy into great businesses when they are out of favor and can hold your stocks (not sell) when the market is falling, then you have the keys to investing success in individual stocks.  Stocks have generated higher returns than any other asset class.  If one has the proper temperament to hold through recessions, an allocation of 100% to stocks is appropriate for maximizing long-term total returns.

If you can cultivate the patience required for a long-term investing mindset, the Dividend Aristocrats List is an excellent place to look for high-quality businesses.  Dividend Aristocrats are stocks with 25+ years of consecutive dividend increases.  They all have (or at the least, very recently had) a strong and durable competitive advantage.  Once you identify a high-quality shareholder-friendly business, you must wait for the business to go on sale.  Then invest, and let the business compound your wealth over the long run.

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David Merkel CFA |  Aleph Blog

merkelTypically I have two pre-questions: “how much are you willing to learn?”  I get this request a lot from people because most of my friends are *not* in the top 5% of all earners, and they want unbiased advice, but can’t or won’t pay for it.  If the answer is  “I don’t want to learn much,” then I send them to buy Vanguard’s Balanced Index fund or Vanguard’s STAR fund (remarkably good).

The second pre-question is: “how much work are you willing to do?”  If the answer is “Not much.” I give them a basic asset allocation, tell them to look at their statement once a year, and rebalance to the target.  The truth is that anything from 80/20 to 40/60 risk/nonrisk will do adequately for most people if they never panic.  Panic and greed are the two ways that people lose big – and the difference between time-weighted and dollar-weighted returns testify to that.  If they are willing to work, I give them a list of books on how to analyze the market for good investments.

The degree to which a person gets afraid should not be a factor in asset allocation.  I try to educate clients that they hire me to hold/tie their hands for the bad and good times.  There are only two factors that matter in asset allocation, and they are:

  • When you will need the money for spending purposes? And
  • How much protection do you want against bad events that may happen between now and then?  What’s the likelihood that you might need to invade this before then, and how much?

Really, that’s all.  Most risk questionnaires aren’t worth the paper they are written on, because all good investment risk control begins with asset/liability matching, and continues with finding dependable investments that allow for the liabilities to be safely funded.

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Jim Blankenship CFP™  | Blankenship Financial Planning

JimBlankenshipWhat are you saving this money for?

(provides the opportunity to understand priority, timeline, etc., of the saving activity)

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Jim Wang | Wallet Hacks

  1. jimWhere does this investment fit in my overall portfolio and approach?
  2. What are the parameters for increasing my investment or decreasing it in the future?
  3. How much time will it take to manage the investment and am I willing to put that much time in?

John Szramiak | Vintage Value Investing

john1. What are your goals and return objectives? Do you want to build a nest egg for retirement? Do you want to grow your net worth as quickly as possible? Or is your main focus on capital preservation? Or generating current income?

2. What are your constraints and time horizon? If the goal is to save enough for retirement, are you going to retire in 30 years or 10 years? Do you have any major purchases coming up, like are you planning on buying a home or paying for your kid to go to college (liquidity needs). Are you in a very high tax bracket, so do you need to minimize your effective tax rate?

3. How much risk are you willing to take? Emotionally, would you be able to see your net worth drop by 50% and not panic? Can you stick to your investment strategy while all of your friends are bragging about how they’re making so much money from some “hot” investment (e.g.  some new tech stock, day trading, or flipping houses)? Risk can also be defined as the probability of not meeting your return objective… So, if you’re currently 25 and you want to retire by the time you’re 40 and you’re “reaching” to meet that goal, your tolerance for risk (i.e. not meeting that goal) will help to inform how aggressively you want to invest in order to attain that goal.

These three questions all tie into each other to help decide overall asset allocation:

For example, if I’m 20 years old and I want to save for retirement (Question #1) in 40 years and I have no constraints (Question #2), then I’d be willing to take on risk (Question #3) because my time horizon is long and by return objective is reasonable. So I’d probably want to invest heavily in an overall stock market index.

But if I’m 20 years old and I want to retire (Question #1) in just 10 years (Question #2), then I’m going to have to have a very highly concentrated portfolio in either a few select stocks or a private investment of some sort – or maybe I’ll even have to start my own business. But only if I’m willing to accept the risk that I might not meet my goal (Question #3).

Or say your goal is capital preservation and current income (Question #1), medium time horizon (Question #2), and average risk tolerance (Question #3), then you’ll probably focus on a diversified bond portfolio or a rental real estate investment.

Also, risk can be considered as just another constraint, so the three questions could be condensed into just two opposing questions: what are your goals and what are your constraints? Or what are your return objectives and what is your risk tolerance?

But I thought it was important to separate constraints like liquidity needs from a constraint like risk tolerance because risk tolerance is so important. And risk tolerance is in part determined by constraints like liquidity needs and time horizon anyways.

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Lance Roberts | Chief Investment Strategist at Clarity Financial

lanceThere are basically three questions I ask before making an investment:

  1. What are the probable outcomes of an investment based on technical conditions? In the short term – price is reflective of psychology. It also sets my stop-loss levels.
  2. What is the value proposition of the investment? Over the long-term “price is what you pay and value is what you get.”
  3. What do I do if am either right or wrong? No investment is ever made without a stop-loss (see 1) and a profit objective (see 2) already determined.

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Michael Kitces | Nerd’s Eye View

I think my suggested question would be “Are you truly diversified against an unknown future?”

The nature of true diversification means that if your expectations work out, SOMETHING should NOT make much money. See this post for further thoughts on this. Most people line up their investments to fit their view of the world – if economic growth is good, or markets are good, etc., then everything in my portfolio will grow. But that also means that if you’re wrong, everything is likely to be in trouble! If you won’t “regret” some part of your portfolio when everything works out, it’s not diversified enough!

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Mike Piper | Oblivious Investor

With regard to portfolio asset allocation, I think the two key questions are:
  • How much of a portfolio decline can you afford?
  • How much of a portfolio decline can you tolerate?
And I think it’s important to answer both questions in dollars as well as percentages. For example, if your portfolio is now several times the size that it was at the beginning of the 2008-2009 decline, a 50% stock market decline would feel very differently than it did then.
With regard to the broader picture (i.e., not just portfolio) I think the most important question is: what opportunities are available to you? For many people, there is some low-hanging fruit available in terms of career investments that will likely pay large returns.
For example, if you’re an accountant in your 20s, going and getting your CPA certification will cost a few thousand dollars and many hours. But the expected return is very high in terms of the impact it will probably have on your total career earnings. (Conversely, if you’re an accountant a few years away from retirement, the cost of getting a CPA certification is the same, but the return would be lower due to having fewer years of earnings for it to impact.)

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Neal Frankle CFP™ | Credit Pilgrim

neal1.  When do you need this lump sum?
2. When do you need income from this investment?
3. How did you react the last time the market dropped more than 20%?  Hold on?  Sell ?  Could you still sleep at night or were you very anxious?

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Steve Burns | New Trader U

  • How long of a timeframe am I looking to hold this investment for before I need the capital back?
  • How will I know when to exit with a profit if it is a winner?
  • What is my plan to exit if I lose money?

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Tadas Viskanta | Abnormal Returns

Arizona_022011_0097smKnow what you own! There is a great temptation to buy the next, new shiny object, i.e. asset class or strategy. Where investors get into trouble is when they invest in something without knowing the true risk parameters. As a result they get anxious at the first sign of trouble and subsequently sell, often at or near the bottom.

Victor Ricciardi | Author of Investor Behavior


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