In the investment world, there is no such thing as a sure thing. Even good investments can turn sour, given a dose of bad news or events outside your control. However, some investments carry warning signs, and those who heed these warnings have a much better chance of avoiding losses or identifying outright scams before they get burned.
Take a look at some of the most common red flags to help you learn what to avoid as an investor.
An Advisor Told You to Buy It
Just because an investment counselor recommends an investment doesn’t mean it’s bad. Brokers who work on commission, however, are not required to act as a fiduciary, meaning they are not required to place a client’s interest ahead of their own.
As some investments pay more commission than others, human nature might push a broker to recommend a higher-cost investment over a competing one. Always check to see how an advisor is paid before you invest.
You Need to Borrow to Buy It
Some sophisticated investors use margin — or borrowing — to leverage the effects of their investment. However, this is best left for high-risk traders. You might be better off picking a safer stock.
If you can’t afford to buy an investment outright and intend to borrow to raise the money, it might not be the best investment for you. In addition to taking on higher risk, you’ll pay interest on your margin loan just to buy the investment.
Everyone Else Is Buying It
Following the herd when it comes to investing is a big no-no. Sure, panic buying sometimes creates a frenzy akin to the Dutch tulip craze of the early 1600s. However, just like that bubble popped, “hot” stocks and markets often crash when the excitement passes and everyone heads for the exit at once.
Rather than buying based on what’s hot, do some research and learn about the fundamentals of an investment.