You may have heard the phrase doing your due diligence and know that it means to do your homework before you take a job, invest in a business or otherwise enter into a relationship that carries some risk.
Although due diligence is a legal term that applies to selling stocks and other fiduciary investments, there is value in having a system that helps you make decisions in your life, whether for your finances or your personal relationships.
Listen to this week’s episode of the “rich & REGULAR” podcast about “Ways to Invest Beyond the Stock Market,” and keep reading below for tips on doing your due diligence in your everyday life.
Most of us do at least a little due diligence in our everyday lives: checking restaurant reviews or comparing prices on an item we’re considering for purchase with various websites and stores to find the best deal. What we call doing our homework or research is actually making sure that we have done a reasonable job checking for the pitfalls and issues that arise when making a purchase.
This diligence can easily apply to more significant decisions, like investing, and help us identify the risks we’re willing to take. As you think about an opportunity—whether it’s investing in stocks, real estate or even a personal relationship—think about the following:
Know who you’re dealing with
It seems logical that you’d know a person before entering into a business deal. Still, for many opportunities, we join them blindly with people who are either a friend of a friend or even people we’ve never met before.
Instead of crossing your fingers and hoping for the best, make sure you research the person you’re considering working with. Do a basic internet search but don’t just take the first listing at face value. Dig a little deeper and verify some of the information listed, especially if they claim a title or accolade that you can cross-check on a verified website, such as a professional affiliation or university accreditation.
It’s also vital to understand the difference in titles or qualifications. Use a website like finra.org, which keeps a list of titles and what they mean, to help you decode the letters after someone’s name and what their legal responsibilities to you are.
Remember that there is a big difference between someone calling themselves an investment adviser, strategist or specialist and a fiduciary who is legally obligated to put your interests ahead of their own.
Create a checklist
As you research and weigh the pros and cons of an opportunity, consider creating a checklist to help you quickly match the opportunity’s particulars to your standards and needs. Make sure to include:
Risk tolerance: Although risk tolerance is something we’ve discussed before, be sure to consider how likely you are to step outside of that tolerance. If you’re the type of person who gets blinded by excitement, make sure to remember that when creating your criteria so that you can try to mitigate the consequences. Knowing yourself is the best way to identify issues before they happen.
Timeline: Pay attention to your timeline. A long-term commitment that spans decades before you see a return could cause problems down the road if you’re looking to use that money to buy a house in the next 3-5 years.
Cost: You should always take the hard costs of an investment into account, including the initial purchase price, transaction or brokerage fees as well as any sale or reinvestment fees.
Be sure to include any opportunity costs that you may have to forfeit by going with a particular strategy. While no one has a crystal ball to see the future, it’s essential to think about what you may be giving up by following a specific path.
Exit strategy: Before entering into an investment deal, contemplate your exit strategy. List out what criteria will help you know it’s time to stop or help you identify a brewing problem. Not only does this help you remember your long-term goal, but it can also help you strategically make decisions.
Volatility: Understanding how volatile an asset or investment is before signing on can save you a lot of worry down the road. While index funds follow the ups and downs of the market, cryptocurrency or real estate might have some more significant swings. Being prepared for the highs and lows can help you keep a measured strategy through it all.
Beware of analysis paralysis
During your analysis, consider setting a hard deadline for yourself to stop gathering information and start taking action. Managing a lot of information is a form of avoidance, and we often use it because we’re scared to make a decision. Remember that no choice is still a choice, and give yourself a deadline to move out of research and into taking action.
Doing your due diligence before investing can save you a lot of time and worry. Having a road map to follow can help you stick to your plan even in the most tumultuous times and reassure you that you’re on the right path. Remember that nothing is perfect, and it’s more important to make progress toward your goals, even if you haven’t wholly optimized every small thing.