When I first started my career, I watched veteran stockbrokers cold-call people about a particular stock, mutual fund, or bond. I always wondered how they could possibly know if the investment they were calling about was appropriate for clients when they had never met them. It was a little bit like doctors writing a prescription before they talk to a patient.
In both instances, they skip the most important question: Why?
In the world of investing, people start with the product and related matters:
- What stock or fund am I going to buy today?
- What asset allocation should I use?
- What estate planning strategy should I adopt?
Most of us are trained to think "what" first, because it's what you hear about all day long. It's the message you read in some financial publications and see on CNBC. But "what" questions should come after we think about "why" and understand "how."
People working in the more traditional parts of the financial services industry have used the product-first approach for decades. Only after pushing you to buy a certain investment do many advisors even attempt to fit it into a larger plan.
Starting with "why" means achieving clarity about your personal financial goals and creating a plan. To reach that point, you need to consider your values and then set some broad goals.
Laura Nash's work on the "How much is enough?" question is helpful here. Or you could look at Howard Stevenson's approach to similar questions. George Kinder suggests three questions to think about, too.
Whatever your approach, just remember to invert the traditional decision triangle. Start with the plan (ask why), then move on to the process (ask how), and only then look for the specific products (ask what).
A version of this post appeared previously at The New York Times.
Carl Richards is a financial planner and the director of investor education for the BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. Visit Behavior Gap for more of Carl's sketches and writings.
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