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How to Identify a Bad Investment Opportunity

Posted by Brad Bridgewater on Oct 28, 2016 6:35:37 PM
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bad-investment-opportunityProfessional advisors often encounter clients or prospective clients who question the performance of their portfolios compared to the claims of less-than-honest individuals or firms. We all know that most “too good to be true” propositions actually are just that, but the following signs will help you safeguard your assets and steer clear of the so-called “opportunities” that can wreak havoc on your portfolio.

The Promise of Impossibly High Rates or Returns

One of the most common ploys used to lure investors into questionable investments is the promise of higher interest rates than are available in the prevailing market or significantly higher returns than existing stocks or funds. For well over a century, the history of financial markets is littered with “guarantees” based on inside knowledge or exclusive strategies. The truth is that financial markets are extremely efficient, and the widespread availability of real-time information makes it nearly impossible to “game the system” for very long.

What the people who offer these investments won’t tell you is that they take on an enormous amount of risk in order to (hopefully) achieve exceptional short-term results. They may be betting that companies that are near bankruptcy will recover, or on low-quality bonds that are more likely to default. These types of investments and the risk exposure they entail are almost never appropriate for individuals approaching retirement.

Limited Time Offers and Extended Time Frame Locks

We’ve all seen late-night infomercials selling everything from cosmetics to do-it-yourself wealth-building programs. These offers have one tenet of salesmanship in common - they create a sense of urgency for the buyer. “Act now!” “Limited time only!” Without this sense of urgency, the consumer is less likely to purchase a product they may not really need. Any investment that is available for a “limited time only” is undoubtedly a short-term instrument that has no place in a well-crafted long-term financial plan. This is especially true if the investment also requires an inordinately long period during which your money is inaccessible to you.

Firms with no Track Record or References

Another warning sign that an investment or firm might not be for you is the lack of a meaningful track record or trustworthy references. Any financial firm whose product you are considering should provide you not only with literature regarding their firm and methodology, but also with trustworthy references who will readily speak with you regarding their experience with that firm. You wouldn’t hire a housekeeper or caregiver without carefully vetting them through their work with others. You should treat the stewardship of your assets the same way. As always, be wary of “projected” or “expected” returns, and never forget the most fundamental truism of financial markets: Past performance is no guarantee of future results.

Excessive Management Fees

Rounding out the list of red flags for investors is excessive management fees. We’ve noted that financial markets are efficient and that unique ideas to generate sustainable big returns are rare. Unless the investment vehicle you’re considering is highly-specialized and requires very specific knowledge, anything more than standard fees should make you pause.

A skilled advisor and a plan for financial security can help you avoid the pitfalls that come with making unwise investment decisions. When choosing investment options, it’s best to evaluate them carefully and avoid those that just don’t feel right.

If you are considering a new financial advisor or would like to learn more about how RAA can help keep your financial life on the right track, request a reference to speak with one of our current clients.  You don’t have to take our word for it, our clients are happy to discuss their experiences with you.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by Retirement Advisors of America following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, Retirement Advisors of America accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning