I am frequently asked for recommendations on how to invest a sum of money that someone has acquired. It can be a small sum from a few hundred to a few thousand dollars, or more than a million dollars in the case of an inheritance.

But before I can even consider dispensing sound advice, I will explain that I am not their financial adviser and that these will be my personal opinions. I then have to ask a few questions. One of the most important is “What are your debts?” If someone has high-interest debt, there is no better investment than paying off that debt.

I next ask about an emergency fund. Everyone needs one. During the recent government shutdown, there were many stories of people in dire financial straits because they missed a single paycheck. Depending on your field and how quickly you think you could find another job, you should have a safe liquid account with two to six months of cash for emergencies.

After first determining that applicable debts would be paid and emergency funds are available, I ask about the person’s wishes for the money. Sometimes they are reasonable — “investing for my child’s college education” — and sometimes they say something unreasonable like “I need to double the money in two months to buy a house.” In the latter case, I find it’s best to simply explain that if those are the expectations, I can’t really help them.

I then need a few more pieces of information before moving on to actually making any recommendations. The first is the person’s time frame. When do they need the money? If the time frame is under three years, the prudent course is to invest extremely conservatively.

Your Risk Gauge

Finally, I have to understand the person’s risk tolerance and investing experience. Most people will overestimate their risk tolerance, so it helps to set up some scenarios and ask how they would respond.

For example, let’s say we buy Apple (NSDQ: AAPL) today, and three months from now it is down 30%. What do you do? Do you ignore this and carry on, or would you sell and look for something new? Do you have a particular threshold at which you would sell a falling investment?

That’s a lot of upfront information, but otherwise I might dispense advice that isn’t right for a person’s specific circumstances.

Because there are many different permutations of circumstances, the advice could range from keeping the money in a Certificate of Deposit (CD) to investing in conservative utilities for income to investing in an aggressive mix of stocks or mutual funds for maximum long-term growth. It depends on your age, time to retirement, long-range goals, and ability to handle risk.

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