What makes an investment good or bad for you? Knowing the signs to look out for might make the difference between losing money and reaching goals.
Ask yourself these 3 questions to help you make the right choice:
1. Are there any red flags?
There are investments that are “bad” for you because they don’t fit your situation, while others are flat-out scams that everyone should avoid.
When an offer seems too good to be true, you should watch out for these tell-tale signs of scams:
- High returns with no risk
Fraudulent money-making schemes typically claim to be risk-free while paying out big, guaranteed returns. Such promises are unrealistic since all investments come with some level of risk.
- Lack of transparency
Steer clear of companies or investments that provide very little or unclear information on how they will handle your money.
You should always be able to understand where your money is going, how it might grow, and the risks it might face.
- Pressure to invest
Legitimate investment companies and brokers give you time to study your options before committing. Scammers often try to rush you into making a decision without giving you time to think.
- Unlicensed investments
Regulatory bodies put safeguards in place to protect investors. This is why you should only transact with agents and entities that are regulated and licensed to offer investments.
2. Does it match your investor profile?
Many people would define a good investment as a venture or asset that can make them a lot of money. However, returns shouldn’t be your only focus when choosing an investment.
That’s because investments that offer high returns often come with an elevated risk of losing money. To avoid facing too much risk, you should know your risk profile.
Your profile is your guide for choosing investments that align with your risk tolerance, time horizon, and experience level.
3. Can it help with your goals and needs?
If you’ve determined that an investment is legitimate and matches your risk profile, you can now check whether it can help you meet financial goals.
Here are some things to look at when evaluating whether an investment may help you get where you want to go:
- Returns
An investment’s historical returns can give you an idea of how it might measure up to your expected earnings. However, past performance isn’t a guarantee of future results.
You can also assess a company or investment’s fundamentals, which indicate financial health, to understand its current standing and prospects.
- Liquidity
Liquidity refers to how easily you can convert an investment into cash. If you need access to your money in the short term, you may want to consider highly liquid investments.
- Diversification
Diversification means spreading your investments across different types of assets to reduce risk. An investment might be considered “good” if it can help you meet your diversification needs.
With the right mix of assets, you can strike a balance between risk and return as well as potential long-term growth and short-term access to your money.
- Fees
Check the fees associated with an investment, like management fees, trust fees, and commissions. These fees can add up over time, so it’s important to know what you’re paying for and whether they’re worth it.
Remember that different investments serve different purposes. An investment that is good enough for someone else might be a bad fit for you, and vice versa.
Telling the difference between good and bad investments involves setting realistic expectations and keeping your unique needs and situation in mind.
