The idea of fast money tends to attract a lot of people, no matter how prudent they may be with handling their finances. When there’s plenty of talk about a seemingly lucrative investment opportunity, you might at least get a little curious.
Should you pursue such an investment? What if it’s nothing more than a fad that will lose its value as quickly as it gained it?
It helps to know how to identify potential investing fads so you can make informed decisions. Keep reading to learn more.
1. Figure out what’s a trend vs. what’s trendy
Investing fads typically start off by showing impressive returns within just a short period of time. You may even confuse their performance with trends that are based on solid factors that can bring sustainable growth.
However, investing fads are not the same as trends. To tell them apart, here are some characteristics to look out for:
Investing trends
- These are mostly based on fundamentals, or the underlying factors that determine financial value such as a company’s profitability and growth prospects.
- They are typically sustained over a certain period instead of changing direction quickly and significantly.
- Performance is measured in actual returns over a specified period, like yearly or quarterly numbers.
Investing fads
- These show rapid and often short-lived increases in price.
- Their value is mostly driven by investor sentiment and herd mentality.
- There’s little to no evidence that their growth will be sustainable in the long term.
- They usually present ‘annualized’ or projected returns instead of actual historical performance.
With fads, market enthusiasm often eventually dies down. Investors realize that they must cash out soon since there isn’t any real reason for prices to keep growing.
What typically follows is a steep drop in prices as many investors look to sell and take profit, creating an oversupply. You’ll likely end up overpaying or taking on a loss if you get on the bandwagon too late.
There’s also a chance you can’t get your money out.
2. Think long-term
Here’s where it gets tricky: some fads may begin as investing trends backed by fundamentals. Though there are solid factors supporting growth, investors may become overly enthusiastic and inflate the prices past a sustainable level.
This presents an opportunity to buy low and sell high for active traders who get their timing right. However, if you’d rather buy and hold for the long term, the ideal thing to do is wait until the hype fizzles out.
To avoid falling victim to time pressure and the fear of missing out, it’s best to go slow and do your research first. Find out whether an investment is actually a good fit by considering your situation and goals.
3. Look for potential investing red flags
Like many get-rich-quick opportunities, investing fads can sometimes turn out to be scams. Watch out for common red flags such as the promise of extremely high returns from unlicensed individuals or institutions.
Ask yourself if you understand clearly how an investment can possibly make you money. Think twice if you’re having trouble figuring out what drives its value. At best, this investment may be too advanced for you. At worst, it could be a scam.
Some fads may also be promoted by people or known personalities who lack the proper authority to give investing advice. To filter out unnecessary noise, it’s best to get investing information from only a handful of trusted sources.
Fast cash is undeniably attractive and it’s human nature to seek the easier route.
Staying informed and making sound decisions may involve taking things slow, but this is definitely the safer and more stable way to reach your goals.
