5 Warning Signs That Point To a Bad Investment

July 3, 2019 6:16 pm

When it comes to growing your wealth, your job and your career may only take you so far. After all, we live in an era of wage repression, where all-too-often our employers will conspire to keep our wages low to insulate their own profit margins. It seems as though we’re all working for longer hours and putting more effort in than previous generations before us, yet our hard work and endeavour never translate to growing wealth. As such, many of us turn to investments in order to grow our wealth.

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Of course, investment is a word with many and varied connotations. Just as there are many different kinds of investors who get into investing in different ways and for different reasons, there are a great many different kinds of investment. Those who seek to grow their wealth can do so by investing in property, trading stocks, trading foreign currencies or even trading commodities that don’t physically exist (cryptocurrencies). Each investment has its own caveats and raft of potential benefits. Of course, some investments are inherently safer than others. For example, when buying a property you contact a surveyor like Navah Consulting to carry out an RICS Homebuyers Report. This will identify any issues which could compromise the validity of your investment. There are other times, however, when a bad investment is somewhat harder to spot.

Still, keep your eyes peeled for these common warning signs of a bad investment and you’ll hopefully be able to insulate yourself from risk and protect yourself from investment frauds while making the prudent investment choices which will meaningfully grow your wealth… 

It’s “so hot right now!”

All investors (especially nascent investors who have yet to gain the lie of the land) dream of the one hot tip that will get them rich quickly. The trouble is that investments that seem too good to be true… Pretty much always are. And the trouble with hot tips is that they don’t stay hot for very long. 

The unfortunate truth is that by the time we hear about hot stock tips, shares have usually been snapped up so quickly that it’s very difficult to get them at a halfway decent price. What’s more, bubbles burst quickly and unpredictably in the world of investment. The last thing you want is to pay an inflated price to climb aboard a bubble that’s just about to burst.

You have to borrow to buy

By rule of thumb, you should certainly avoid borrowing to pay for an investment. Even if you’re told that an investment is a sure thing, there’s always a degree of risk. While there are some high risk traders that use “margin” (trader talk for borrowing) to fund their investment, this is most certainly not a viable strategy for those new to the game.

As such, borrowing to fund your investments can create way more problems than it solves. Not only are you lumbered with the debt and money loss incurred through interest, you have no guarantee that the risk will pay off. The last thing you want is to lose everything on a bad investment and be lumbered with a crippling debt for your trouble. 

It’s a “limited opportunity” deal

There’s always an element of striking while the iron is hot when it comes to investments. Sit on them too long and as other traders buy, the value and monetary cost are increased. Nonetheless, be wary of anyone trying to pressure you into once in a lifetime limited opportunity investments. 

Many new and naive traders lose money on investments which they are strong armed into by people who get them to commit within 24 hours. A good, solid investment will almost always be around tomorrow and the day after and likely for the rest of the week and even by next month. That’s usually more than enough time to do your homework and make an informed decision about whether to invest. 

If someone is trying to pressure you into making ill-informed decision within an unreasonable time limit (or, Heaven forbid, on the spot) this is a clear sign of a dodgy investment broker

Image by Mohamed Mahmoud Hassan via Public Domain Pictures

It’s value has dropped… significantly!

We all love a bargain, right, and when you see a stock that has dropped significantly in recent months you may feel as though it has nowhere to go but up. While cheap stocks can represent a good investment, there’s absolutely no reason to be bullish on them.

Stocks that are low in value can almost always go lower before they rebound. This is why many traders refer to stocks like these as like trying to catch a falling knife. Remember that stocks don’t rise or fall in value arbitrarily. Your best bet should always be to research the reason for the drop and the potential for events that could turn it around. 

You need to keep hold of it for a set period of time

Fluidity is important in trading. You need to be able to jettison stocks that aren’t working for you quickly and put your money somewhere less risky when they go bad. If an investment comes with the caveat that you are not allowed to sell it for a set period of time, this should definitely be seen as a red flag.

The last thing any investor needs is to have to watch powerlessly as their money slowly trickles down the drain. 

So, how do you protect yourself from bad investments?

One of the best ways to insulate yourself against bad investments is to find a broker whom you can trust. Nerdwallet have some great tips for choosing an online investment broker. A reputable and trustworthy broker will help you to mitigate the inherent risks of trading while also making informed recommendations which could grow your money significantly. Familiarise yourself with the warning signs that an investment is about to turn bad or is best avoided altogether. 

As in all things, there is a learning curve. However, with a little knowledge and patience, you can grow your wealth significantly, plan for the future and live the lifestyle you want rather than waiting for crumbs to fall from your employer’s table. 

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