In building wealth, it is always advisable to seek relevant knowledge and information before making an investment decision. There are always red flags in every investment, but we often ignore them or are simply ignorant of them.
If not avoided, it may take years to recover from investment loss; some never even recover from it. A smart investment might yield profits of 15% to 20% each year, and poor investments can quickly lose much more.
As a result, certain types of investments should be avoided regardless of your risk tolerance. They are not equal to the risk. In addition to losing your money, you will worry and waste your time.
Fortunately, there are several financial warning signals and red flags that may assist you in identifying the investment to avoid.
1. High-yielding investments with little or no risk
This is a standard indicator of investment fraud. This is because every investment entails some level of risk, and a higher level of risk usually accompanies the tendency for higher profits.
Therefore, investing in opportunities too good to be missed is bad. It is often a red flag if it seems too good to be true.
2. You have no idea what you’re investing in
One of the golden laws of investing is to invest in something you know about. It’s better to keep away if you do not know what any of the things imply or how to accomplish it yourself.
You may start by reading and learning from topics that pique your interest but never invest in things beyond your comprehension.
3. Unregistered Persons
Even if you know the person proposing to sell you an investment, be sure they are registered and regulated. Many securities scams that prey on investors are done by unregistered/unlicensed people who offer securities.
You may research the investment and the person or firm offering you the investment.
4. Be aware of the Financial Professional’s Background
You need to be aware of any potential red flags in the professional’s background. This is to avoid unforeseen concerns.
The records from your state securities regulators can be utilised to spot possible concerns such as:
- Businesses that have been kicked out of the securities industry.
- Personal insolvency.
5. Pressure to buy right away
No credible financial expert will unduly pressure you to make an investment choice right away or convince you that you must act immediately.
However, if such happens, walk away from such an investment.
6. Free Meals
Be sceptical of investment seminars that offer “free lunch.” The purpose of free lunch investing seminars is usually to attract new customers and promote investment products rather than educate about investment.
If you plan to attend one, beware and don’t get carried away by the organiser’s freebies. Research the company or persons behind the seminar before you go there, and if you notice anything phoney about them, don’t part with your hard-earned money.
Even if the complimentary lunch does not include a high-pressure sales presentation, you should anticipate a hard sell from the individual selling the investment in the following encounters.
7. When asset administration is done without a third party
Asset administration is usually handled by a third-party administrator or custodian in legitimate asset management firms.
This implies that the asset manager does not have total control over the customer’s funds, protecting the client from investment fraud. Another defence against fraud is third-party compliance and auditors.
This isn’t to say that the fund manager can’t make incorrect decisions, but the alarm will go off if risk restrictions are exceeded.
Also, when a corporation just has one bank account and no outside service providers, the tendency of client money going missing is substantially higher.
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