Three Questions to Ask Before You Invest in Anything

Someone will bring you an opportunity this year. It will sound reasonable, the person offering it will be likeable, and there will be a reason to decide quickly.

Before any money moves, answer three questions.

1. How does this actually make money?

Not "it grows" — the mechanism. Who pays, for what, and why would they keep paying? A money market fund lends to institutions and passes on interest. A rental property collects rent from a tenant who needs somewhere to live. A business sells something at more than it costs to make.

If the answer depends mainly on new participants joining, you are looking at a structure, not an investment.

2. What has to go wrong for me to lose money?

Every investment has a failure mode. Property has vacancy, illiquidity and legal risk. Equities have business risk and volatility. Lending has default risk. A good opportunity does not have no risk — it has risks you can name and are willing to carry.

Be suspicious of anything presented as risk-free. Returns and risk travel together; if someone has removed the risk from the description, they have not removed it from the investment.

3. How long must I leave it alone?

Time horizon decides suitability more than return does. Money you need in eight months does not belong anywhere that could be down when you need it. Money you will not touch for ten years can tolerate a great deal more.

Match the money to the horizon and half the stress disappears.

A note on advice

Understanding how an option works is education. Being told what to buy is advice, and advice is regulated for good reason. Learn the mechanics yourself, then speak to a licensed professional where your situation calls for it.