Identifying Red Flags In Investment Opportunities

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drip feed or lump sum investing

The investment journey is a long and arduous one. Therefore, making some mistakes along the way is perfectly fine, as long as you are making informed and healthy financial decisions. After all, there’s no such thing as a guarantee on your return.

On the other hand, getting started can be complicated due to the amount of misinformation and scams available on the internet. As such, it does help for you to know some of the more common red. Here are a few examples of them.

High returns guaranteed for little to no risk

Investments always come with a risk. Different investments simply offer different levels of risk. As a rule of thumb, the riskier the investment, the higher the possibility of even greater returns. Consequently, lower risk investments tend to offer lower returns as well.

There is no guarantee that you will gain absolute profit when investing in things like stocks. As the potential return increases, so does the chance of losing money. If an investment opportunity guarantees unconventionally high returns but insists that there is little to no risk, this should raise a red flag. According to Forbes, the basic rule of thumb in investing is that a 7% return of investment (ROI) per year is considered good for long-term investments. Up to 10% is already considered quite high. Anything higher is possible but incredibly challenging, so be on alert for possible scams once it reaches this threshold.

Investing can get very complex, especially since different investments have varying levels of risk and returns. It’s up to you to choose a good fit based on your preferences, risk appetite, and dedicated time. 

Everyone is jumping on the bandwagon

It might be tempting to go with the flow and invest in something that everyone else is investing in as well. If anything, the classic 1600s’ Dutch Tulip Mania incident has taught us that bubbles do burst eventually. This applies to stocks and markets as well when the buzz wears off and everyone rushes to exit. 

For context, Tulip Mania began when tulips were introduced to Europe in the 16th century. They quickly became a highly coveted luxury item. The Dutch managed to corner the market and prices soared to extreme heights due to demand. Unfortunately, many bought tulip bulbs on credit, so when prices eventually fell, many were forced to sell their tulips at a loss. At the time, the issue was so widespread that it destroyed trust throughout the nation.

It is always better to do some learning and research into a certain stock before buying in, rather than making a purchase based solely on what’s trendy.

You are pressured to buy

If someone is pressuring you to buy stocks, you should not do so immediately, no matter how urgent it may seem. Scammers frequently employ high-pressure sales techniques to get potential victims to spend on impulse. 

It is likely not in your best interests if you are pressed for time or given an offer that only lasts for a short while. Scammers are aware that if you take the time to investigate, you will be far less likely to get duped by their schemes.

It is too complicated

Some investments are simple and straightforward. Others can be very complex and confusing. A financial advisor or experts should be able to explain the structure of any investment product they recommend to you, as well as the investment process. 

Generally, you should pass on any investments that you can’t wrap your head around, or if the financial advisor is unable to explain how it works to you in a way that you understand.

When goals keep shifting

When targets or goals are missed or are constantly getting pushed back, this is yet another red flag for risky investments. This may occur if a financial advisor suggests an investment that underperforms. For example, an advisor suggests investing in solar panels due to recent breakthroughs in the renewable energy market. These breakthroughs could guarantee around a 8% per annum ROI over the next 12 months. However, it turns out that the breakthrough is only a minor improvement over current solar technology. The advisor then shifts the goal posts by establishing a new benchmark, saying that you can still get the 8% ROI, but now in 24 months instead, rather than admitting the poor decision. Businesses also tend to do this when they frequently modify their approach.

Delayed results announcements

Transparency is king when it comes to investing. Companies that are not fully transparent with their shareholders will likely come under greater scrutiny. Likewise, companies that delay or put off disclosing its financial results typically means bad news is on the horizon. It could also possibly mean that the company’s auditors are hesitant to certify the outcomes. This could very well mean that the stock is a poor investment.

Referrals

Have you ever received an invite to exclusive gatherings or meetings that promises fantastic  investment opportunities that they are giving you access to? Keep an eye out for this kind of behaviour as it is a massive red flag.

More often than not, these kinds of investment opportunities are pyramid schemes or the dreaded multi-level marketing. The nature of this scam’s referral model means that intimate friends and family members often fall victim to them. Avoid events that encourage you to invite others to profit from investments. Such gatherings could be harmless, or it could end up being an illegal scam.

This is by no means an exhaustive list of investment red flags to keep an eye out for, but it should give you a clearer idea on what to avoid when looking for your next big opportunity. Always remember that the financial landscape is not always filled with the most altruistic motives. The best investors must always be on the lookout for the telltale signs of bad investments. If you would like to know more, iMoney also has an article regarding how to spot common investment opportunity scams.

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