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Flashy investments can be a bad deal for individual investors, but there are often warning signs accompanying a bad investment.
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Investors should research and learn about each opportunity before committing any money.
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Consider working with a fee-only, fiduciary financial advisor to develop an investment plan that aligns with your goals.
In the world of investing, people often look to gain an edge or get rich quickly, but that drive can push them to bad or even fraudulent investments. For instance, they might opt for an investment with excessive fees or a stock without knowing much about it, as they’re drawn to fast money.
Even if an investment seems attractive on the surface, it may end up being bad news, and some investments you may not be able to escape from so easily, either. If the investment you are considering has any of these warning signs, it may be best to steer clear from the start.
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It may be easy to become enamored of a stock when it’s rising. It seems to go up week after week, so you may feel compelled to buy quickly to ride the momentum. But this sense of urgency is rarely a good sign. High-flying stocks can turn around just as quickly, leaving you with way less than you invested. Good stocks tend to run higher for years, if not decades, meaning that if it’s truly a great opportunity, you can buy after you understand the investment better.
What to look for instead: Some investments overpromise and underdeliver. Instead of looking for high-flying stocks with exponential returns, look for ones that make sense for you. Ensure the investment aligns with your goals and risk tolerance first. Even if you miss this one, there will be plenty more investment opportunities down the line. If it is such a great long-term opportunity, you won’t have to invest all your money right now, anyway. Instead, you’ll be able to use dollar-cost averaging and buy more over a longer period.
If you ask for help from an investment advisor and they go for the hard sell on a particular stock, it might be a red flag. While many investment advisors are fiduciaries, meaning they must act in their client’s best interests, many other so-called advisors are salespeople in disguise. Some work on commission, so they might be incentivized to push certain investments, even if they aren’t what’s best for the client.
What to look for instead: Investment advisors who have your back are a better choice for individual investors. Look for a fee-only financial advisor and check that they are a member of the National Association of Personal Financial Advisors or a similar organization. (Here’s how to find the right advisor for you.) In addition, do your own research on the investment and ensure it aligns with your goals. That’s true regardless of how your advisor is paid.
You might hear about a stock that is the “next Netflix” or something along those lines. Usually, the reality is much less exciting. But hucksters will throw these sensational lines around to convince others to buy into a particular investment. There might be a next Netflix or a next Amazon, but these stocks are extremely difficult to predict. Even if someone could predict them, it’s unlikely you would hear about it from a stranger on the internet.
What to look for instead: Rather than jumping into these investments, work with a fiduciary financial advisor to develop a strategy that works for you. Then, if you’re still interested in that next big thing, run it by a trusted investment advisor and see what they say.
Some investments might seem attractive if a bit opaque or difficult to understand. For instance, you have probably heard of people making millions by investing in cryptocurrency. But there are probably a thousand crypto horror stories for each of those success stories.
One problem with crypto investments is that people often dive in without knowing much about it. Crypto and other alternative investments may not be a bad choice if you know what you’re doing, so educating yourself first is important. If not, you could be setting yourself up for failure. And that’s true whether you’re buying highly speculative crypto or more established investments such as index funds.
What to look for instead: Looking for new or alternative investments isn’t necessarily a bad thing. However, it can be detrimental if you’re walking into an investment with little to no knowledge. Take time to educate yourself about potential investments first — and run it by your financial advisor if you have one.
Let’s get one thing out of the way: all investments carry risk. Even relatively safe investments, like U.S. Treasurys or CDs, are not entirely risk-free. Suppose someone tells you an investment has guaranteed returns of a certain percentage or they say it carries no risk. This person is either dishonest or they don’t know enough about the investment, and neither is a good sign. This type of pitch is often a sign of an investment scam, so it may be best to avoid it entirely.
What to look for instead: While investments like Treasurys and CDs are not risk-free, they are less risky than individual stocks. If you are nearing retirement, consider low-risk investments to preserve your wealth. You should also diversify your investments so you aren’t too heavily weighted in a single asset class.
Generally, an investment is only a good fit for you if it aligns with your goals. For instance, while a diversified portfolio of stocks has been a great long-term investment, though with big declines from time to time, it may not be right for retirees, who typically need a stable source of income. Maybe you can’t handle seeing your investments drop overnight or you will be retiring soon and can’t handle this amount of volatility. So the investment has to fit your needs.
What to look for instead: No matter how great an investment’s potential returns are, it’s probably not right for you if it doesn’t align with your financial goals. It’s important to have an investing plan and stick to it. Recent college graduates can often assume more risk because they may have decades until retirement. Conversely, retirees typically need lower-risk investments. This is why your investment strategy must match your financial goals and circumstances.
Every now and then, an investment comes along with results that sound too good to be true. But as the expression goes, “If it sounds too good to be true, it probably is.” If you hear about an investment and can’t believe something like it could be possible, it probably isn’t possible. There are exceptions, but those are few and far between. More often, an empty promise will leave you rife with regret. Instead, you should opt for investments that align with your goals.
What to look for instead: One of the best proven wealth-building strategies is to buy an S&P 500 index fund and then add to it year after year. In fact, it’s what legendary investor Warren Buffett recommends. Low-cost, diversified index funds are among the best wealth-building tools available.
Investing can be a tricky game. Often, people try to beat the game by searching for investments that give them a leg up over their peers. While these opportunities might exist in some cases, it’s more likely that what you’ll find is a bad investment, and you’ll end up even further behind on your investment goals such as a financially secure retirement. A financial advisor can help you avoid these types of investments and stick to your financial plan.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
