When trying to make money in the markets, too many investors believe that buying stock is the first thing they should do.

It isn’t. It’s the last.

Before that moment you pull the trigger on a shiny new addition to your portfolio, there’s a long list of considerations that you need to mull over.

All too often, the randomness of “I’m gonna buy a hundred shares of…” whatever, is preceded by an expert’s tip on cable, or by mere moments of thought, sometimes little more than the impulse buy you make as you wait your turn in a supermarket checkout line while perusing the latest National Enquirer.

Does anyone really make a special trip to get the latest edition of The National Enquirer?  Well, that’s a whole other story.

Strategic Asset Allocation. Be the Market.

The goal of this post is to list the questions (not necessarily in order of importance) that lead to the orderly process of decision making that must proceed your pulling the trigger on any new addition to your portfolio.

  • What are my overall financial goals?
  • What is my overall investment objectives?
  • Does this new investment help me achieve those objectives?
  • What is my time horizon?
  • When would I like to retire?
  • How much risk am I willing to take?
  • Do I need income now or later?
  • What’s my downside?
  • How does this investment fit with the rest of my portfolio?
  • Am I adding to a taxable, tax-deferred or tax-free account?
  • How much liquidity do I need to maintain?
  • How does this affect my ability to make future investments?
  • What is the fee or commission structure and can I do better?
  • Do I pay commissions once?
  • Do I pay fees forever?
  • What do I get from my advisor for paying her?
  • What are the costs to get in?
  • What are the costs to get out?
  • Will this add to my diversification or simply add an overlapping position?
  • What is the capitalization category?
  • What is the track record for this investment?
  • Is there something better for me in the same category?
  • Am I following my overall allocation strategy?
  • Is someone I don’t really know or trust making a blind recommendation?
  • Why did I pick this geographic region, sector, industry or company?
  • Do I really know what this company does?
  • What is my “desired” rate of return?
  • What is my “required” rate of return?
  • What “asset location” strategy is best for me?
  • Is this a time-tested thing or merely a fad?
  • Is this a good investment, but the wrong time?
  • What is my exit strategy?
  • Do I need one?
  • So, where do I begin?

This post offers no answers; only questions.

The goal here is to stress the critical nature of asking the right questions. And lots of them before you make a new investment, or sell an old one that is no longer performing up to your original expectations. Yes, due diligence matters, but, sadly, few investors take the time to perform the necessary and adequate front-end research.

Regardless of how long or detailed your questions list is, I hope you realize that buying that stock is the last thing you should do.

Happy hunting!