How To Spot A Bad Financial Investment

You have been grinding hard at your job lately. You haven’t taken any extra days off. You have been watching your expenses consciously, making decisions to avoid unnecessary cash drains, and have put aside surplus balances. You have been practicing frugality with patience. And all of this has resulted in the addition of some extra zeros in your savings account. You feel now is the time you should put this amount to good use to generate an additional source of income for yourself.

However, as the search for good investment opportunities begins, you are constantly bombarded by a barrage of information. Deciding on the first step may seem overwhelming. Should you buy government bonds? Or should you jump headfirst into the stock market? What about mutual funds and ETFs? Are they a good option? Maybe hanging out with bankers and talking in finance jargon is not your cup of tea. Should you consider flipping cars then? If capital allows, perhaps a mortgage deal could work out.

Unfortunately, some vultures will always be looking to part fresh investors like you from their hard-earned capital when there is profit to earn. Being careful and aware is as crucial as finding the right opportunity to invest your savings. If an investment goes wrong, you will have to bear the brunt of a bad decision in the shape of a financial loss.

What “red flags” to look out for?

It is impossible to cover all kinds of red flags since every investment opportunity has risk tied to it. Suppose you wish to learn more about investments and step into the world of finance. In that case, an MBA with accounting concentration will equip you with the proper knowledge to become an intelligent risk-taker. However, we have narrowed down the general principles behind the salesmanship tactics of borrowers and pseudo-financial advisors. Consider these pitches as a sign of someone trying to drag you into making a bad investment choice.

  1. “You have very little to lose on this.”

This principle involves getting an investor excited by showing them that they don’t have much to lose. Investors facing such tactics should focus on the possible downsides of investments that, on paper, seem to be “less risky.” Losses generally don’t realize until you make a decision. Therefore, doing thorough research and a risk assessment would help in making an informed decision.

Examples of such scams include small investments that do not require much upfront capital. Their “business model” relies on getting fresh investors to commit to small monthly payments. These investments might end up draining more money than what you initially anticipate. Buying that luxury watch on credit card installments might end up costing several times the actual amount through markup cost.

  1. “This investment will make you the next Charlie Munger.”

It is a common tactic used in investment markets – suggesting trades or investment opportunities in sketchy businesses with the promise of exponential returns in the future. Fraudulent salespeople convince the investor that the company/business will become the next Google, Amazon, or Facebook – turning fresh investors like you into the next Warren Buffet or Charlie Munger.

It does hold that new startups have exponentially risen in the past decade and are on their way to competing with existing giants in the market. But what an investor needs to keep in mind is that there were thousands of other failed startups with every successful Tesla or Uber. Some startups do exceptionally well in a short period like Snapchat. But not every new business enjoys the same level of success. Therefore, fresh investors need to take such opportunities with a pinch of salt. Always prioritize research over marketing gimmicks that promise celebrity status.

  1. “Time is running out; seize this once-in-a-lifetime opportunity.”

These statements are generally thrown around in more volatile investment markets. Cryptocurrency and the rise of bitcoin encapsulated this phenomenon. With every jump in the price of bitcoin, more people started buying into the idea of blockchain. Existing traders continue to market investment opportunities in crypto as time-sensitive.

The bullish pattern of prices and panic amongst buyers led many investors to dump their cash in crypto markets without research. And as expected, all booms are followed by crashes and vice versa. This resulted in investors making huge losses since they bought into the market when the prices were soaring. Once the buying frenzy ended, the value of bitcoin dropped hard, realizing massive losses for investors. While cryptocurrency is still a viable investment that promises good returns, it is always better to wait before putting all your eggs in one basket.

  1. “This will make you quick money without working.”

Everybody wants to make quick make money without working or putting in a minimum amount of effort. Some borrowers play on this desire by offering attractive schemes.

It is a common tactic used by the pyramid and Ponzi schemes. They promise an opportunity to make money without any extra education or work. The greed and excitement of getting rich without having to work often lead fresh investors into traps resulting in irreparable damage to their financial situation.

  1. “I will tell you the secret of becoming rich.”

The rise of social media has given birth to a new generation of salespeople and marketers – or scammers – trying to sell the secret of making wealth. They claim to hold information that can make a person discover instant wealth. Before teaching those secrets, they ask investors to pay exorbitant amounts for seminars, courses, or lectures. More often than not, these marketers are looking to make a buck off investors by selling them faux hopes and generalized information.

This ‘art of selling’ usually involves multi-level marketing and attracting people with the promise of making them rich. It works on a Ponzi scheme-like structure. Person X teaches a group Y generalized information and charges them a certain fee. Group Y then looks for other investors by promising them the same ‘secrets’ in exchange for a fee. And the cycle continues.

No doubt, there are legitimate people out there as well who are experts in their field. Through years of grinding, hard work, and mistakes, people often reach a high level of expertise and wisdom. Their advice comes with years of knowledge and self-education. Therefore, it is best to learn from such experts. However, keeping a watch out for pseudo-experts waiting to take advantage of and rip investors off their money is equally important.

So, what is the way forward?

There are a plethora of lousy investment opportunities designed explicitly for naive investors. These bad investments can take the shape of both online and physical assets. They could either come in the form of dodgy stocks, sketchy real estate, insider information in investment markets, or in the promise of becoming rich in 25 days. The first step is to verify the credibility of the person or company selling the investment opportunity.

It would be best to avoid companies or individuals with a bad reputation and low trustworthiness. However, mistakes can still happen. Investing is a game of risk and patience. The only way to minimize losses is through research and self-education. With the proper knowledge and understanding of an investment opportunity, it will be tough for phonies to steal your hard-earned money away from you.

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