By Brad Thomason, CPA
My general position on asset selection is that it’s your money, and you can invest it however you see fit. That said, I also support the position that it’s a good idea to have a solid familiarity with the specifics of any investment which you participate in.
Just because you are free, as a matter of right, to go launching off into whatever you want doesn’t serve as an argument that you should.
When you understand the particulars of various investments, it sets the stage for solid logical conclusions about when and how to use the various alternatives.
If you have a chunk of money that you are looking to park for 9 months until your kid goes off to school, you are very unlikely to use those funds to purchase an office building for rental income production, as a for instance. At least you aren’t, provided you understand what you are getting into.
Understanding the details doesn’t necessarily grant a person any special power to make investment risk go away, completely. But it is useful in terms of setting expectations and using those expectations for projection purposes which are often a lot more realistic than uninformed guessing.
Perhaps the greatest value is that it helps you know what not to do. Some things are simply not a good fit for a particular situation, but your odds of knowing that are severely constrained if you don’t have any familiarity with the inner workings of a particular investment, beforehand.
On the surface, this might seem like a consolation prize. After all, I think we’d all prefer to have certainty about what we ought to do, not a bunch of superfluous commentary on what not to do.
Except that I don’t think commentary on what not to do is superfluous. Far from it. A single bad investment can wipe out benefits won over the course of many past investments which did go the right way. This stuff has teeth.
As the old saying goes, sometimes the best deals are the ones you don’t do. So anything which serves to keep you from stepping off into a hole – even if it doesn’t tell you specifically where you should step – has value.
You just have to recognize it for what it is.
And you have to spend some time doing the homework in order to gain the kind of understandings which people only get as the result of meaning to and working at it.
Older blogs (2015-2017)