In the investing world, people often try to gain an edge or get rich quick, but that urge can drive them to make bad or even fraudulent investments. For example, they may choose an investment with excessive fees or stocks without knowing much about it because they are attracted to quick money.
Even if an investment seems attractive at first glance, it can ultimately be bad news, and some investments may not be easy to escape. If the investment you’re considering shows any of these warning signs, it’s best to stay away from it from the start.
7 signs that an investment probably won’t work out
1. You have a sense of urgency to buy, buy, buy
It can be easy to fall in love with a stock when it’s rising. It seems to be rising week after week, so you may feel compelled to buy quickly to capitalize on the momentum. But this sense of urgency is rarely a good sign. High-flying stocks can turn around just as quickly, leaving you with far less than you invested. Good stocks typically continue to rise for years, if not decades, meaning that if it really is a great opportunity, you can buy after you understand the investment better.
First, make sure the investment fits your goals and risk tolerance. Even if you miss this one, there will be many more investment opportunities later. If it’s such a great long-term opportunity, you don’t need to invest all your money right now anyway. Instead, you can use dollar-cost averaging and buy more over a longer period of time.
2. An investment advisor pressures you to buy it
If you ask for help from an investment advisor and they hard-sell a particular stock, this could be a warning sign. While many investment advisors are fiduciaries, meaning they must act in the best interests of their clients, many other so-called advisors are salespeople in disguise.
Some work on commission, so they may be incentivized to drive certain investments even if they are not best for the customer. So it’s usually best to work with a fee-based financial advisor and check whether 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.) Additionally, do your own research on the investment and make sure it fits your goals. This applies regardless of how your advisor is paid.
3. The investment is “the next big thing”
You may hear about a stock being the “next Netflix” or something along those lines. Usually the reality is much less exciting. But hucksters will throw around these sensational lines to convince others to make a certain investment. There may be the next Netflix or the next Amazon, but these stocks are extremely difficult to predict. Even if someone could predict them, it’s unlikely you’d hear about them from a stranger on the internet.
Instead of 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 through a trusted investment advisor and see what they say.
4. You don’t know anything about it
Some investments can seem attractive if they are a bit opaque or difficult to understand. For example, you’ve probably heard of people making millions by investing in cryptocurrency. But there are probably a thousand crypto horror stories for every one of these success stories.
One problem with crypto investing is that people often dive into it without knowing much about it. Crypto and other alternative investments may not be a bad choice if you know what you’re doing, so it’s important to educate yourself first. If not, you may be setting yourself up for failure. And that’s true whether you’re buying highly speculative cryptocurrencies or more established investments like index funds. Know what you own.
5. You’re told it’s risk-free
Let’s get one thing out of the way: all investments involve risk. Even relatively safe investments, such as US government bonds or CDs, are not completely risk-free. Suppose someone tells you that an investment has a guaranteed return of a certain percentage, or says that there is no risk involved. This person is dishonest or doesn’t know enough about the investment, neither of which is a good sign. This type of pitch is often a sign of investment fraud, so it may be best to avoid it altogether.
6. It doesn’t align with your goals
In general, an investment is only suitable for you if it matches your objectives. For example, while a diversified stock portfolio has been a great long-term investment, although there are occasional big drawdowns, it may not be the right choice for retirees, who typically need a stable source of income. Maybe you can’t handle your investments dropping overnight, or you’re retiring soon and can’t handle this amount of volatility. So the investment must suit your needs.
No matter how great the potential return, it’s probably not right for you if it doesn’t match your financial goals. It is important to have an investment plan and stick to it.
7. The investment sounds too good to be true
Every now and then an investment produces results that sound too good to be true. But as the saying goes, “If it sounds too good to be true, it probably is.” If you hear about an investment and can’t believe something like this could be possible, it probably isn’t possible. There are exceptions, but they are rare. More often than not, an empty promise will leave you full of regrets. Instead, you should choose investments that match your goals.
One of the best proven strategies for building wealth is buying an S&P 500 index fund and adding to it year after year. In fact, this is what legendary investor Warren Buffett recommends.
In short
Investing can be a tricky game. Often people try to beat the game by looking for investments that will give them an edge over their peers. While these options exist in some cases, you are more likely to encounter a bad investment and fall even further behind on your investment goals, such as a financially secure retirement.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
