Who is Accountable if the Investment Goes Wrong (loss, default, etc.)?

When it comes to your investing, “Where does the buck stop?”  Anytime you get involved with an investment, you do so because you believe that it will go well.  One of the most important things to do when making any new investment decision is to think through all the possible negative outcomes so you have a good feel for the full spectrum of possibilities.

If things go wrong, who is responsible?  Of course, the bottom line answer is always: you!  If there’s a possibility that you might be looking for someone to blame then you should never have made the investment in the first place.  The buck stops with you.  You must understand that the full weight of responsibility is on your shoulders.  Knowing this will quell the urge to blindly trust someone else with your investment decision.

That being said, there are circumstances where more than just you might be involved in the accountability of an investment decision.  If you are going into an investment with a partner who is bringing different assets to the equation, do you feel comfortable with his/her ability to navigate the treacherous waters within your partner’s area of expertise?  If things were to turn in this direction, you may well feel the need to get involved, but depending on the level of expertise required, you might be heavily dependent upon this partner in this area.  Are you comfortable with that?
For example, let’s say you decide to buy a property with your friend, John, who has skills in home construction and renovation.  You, on the other hand, bring to the table the money & banking relationships/credit necessary to finance the project.  If a massive plumbing issue breaks out, you will be heavily dependent on John to fix this problem.  At the end of the day, any loss that might develop falls back on you and so you are ultimately responsible, but during the project, you are dependent on John.

A somewhat similar, although totally different example:  if you invest in a holding company stock.  The most famous example of this is Warren Buffett’s Berkshire Hathaway, although there are many others.  If you invest in this company, your only options are to buy or sell.  You have no input or influence.  If you made a bad set of buying & selling decisions you have no one to blame but yourself when you subtract your losses.  However, you probably decided to make this investment based upon the expertise of the money manager you are relying on.

This is Part 6 in the series Investment Due Diligence. To continue with this series, click on Pt 7. To use this as a growth tool to better understand your own calling, you might start by reading Part 1, Pt 2, Pt 3, Pt 4 and Pt 5.

Photo credit: prozac74

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