The before-you-buy checklist for any investment

Most investing mistakes are made in the few minutes before a purchase: a rushed decision after a headline, a tip from a friend, a price that "has to" go higher. A checklist slows that moment down. Pilots and surgeons use checklists not because they lack skill but because skill does not prevent lapses under pressure. Investors are no different.

Part 1: What are you buying?

1. Can I describe it in two sentences? For a company: what it sells, to whom, and how it makes money. For a fund: what it holds, how it chooses holdings and what it costs each year.
2. Have I read the primary source? For a US-listed company, the latest annual report (10-K) and quarterly report (10-Q). For a fund, its prospectus or fact sheet. Our research guide on how to research a stock explains where to start.

Part 2: Why now?

3. What changed? Name the specific development that makes this worth buying today rather than last month or next year.
4. What evidence supports it, and what contradicts it? Write at least one piece of evidence against your idea. If you cannot find any, keep looking.
5. Over what period should my reason play out? A reason without a timeframe can never be proven wrong.

Part 3: What are you paying?

6. What does the price already assume? Compare valuation with the company's own history and with similar companies, and ask what growth the price seems to expect. A good business can be a poor investment if the price assumes too much.
7. What are the costs? Trading costs, spreads, fund expense ratios and any tax consequences in your account.

Part 4: How much, and how will you get out?

8. How large will the position be? As a share of the portfolio, and within the limits in your written policy. Use a sizing method like the one in our position sizing guide.
9. What is the most I am prepared to lose, and where would I exit? A price level, a fundamental change, or both. Remember that prices can gap past a planned exit.
10. What would make me sell for a good reason, too? A target, a valuation level, or the position growing beyond your concentration limit.

A one-page version

How to use the checklist

Fill it in before every purchase, including additions to positions you already own. It should take ten to twenty minutes once you are used to it. If a question stops you, that is the checklist working: it has found a gap in your reasoning before the market did.

Keep each completed checklist. Together they become the backbone of an investment decision journal, which lets you compare what you expected with what actually happened and learn from both.

Red flags that should stop a purchase

• Urgency. "You have to get in before Monday" is a sales tactic, not analysis. Real opportunities rarely expire in hours for a long-term investor.
• You cannot find the primary document. If a claim about a company does not appear in its filings or an official source, treat it as unverified.
• The position would break your own limits. If the idea only works at a size your policy does not allow, the idea does not fit your portfolio.
• You are buying to make back a loss. Trying to recover quickly from a mistake is one of the most common causes of a second, larger mistake.
• You would be embarrassed to write down the reason. If the honest reason is "everyone is talking about it", write that down and see whether you still want to buy.

What the checklist does not do

A checklist does not guarantee a good result. Well-reasoned investments can still lose money, and careless ones sometimes make money through luck. What a checklist does is raise the quality of your decisions and make them reviewable. Over many decisions, that is what you can control.

The full before-you-buy checklist, along with worksheets for economic context, investment research, position sizing and decision review, is included in our ebook How to Choose Investments, Manage Risk, and Build a Portfolio: With the Money You Have.