5 Ways to Know You’re Making a Bad Investment

Bad investments can have negative effects on your finances for years. How can you tell solid stocks from illegitimate investment opportunities? The following warning signs can help you determine whether investing is a good idea.

Your Adviser Works on Commission

Image via Flickr by kenteegardin

Not all financial advisers have your best interests in mind. Those who work on commission may recommend investments solely based on which ones will help them profit. This point is especially true for high-cost investments since these types of investments will maximize their commissions.

To make sure you’re not getting swindled, switch to a financial adviser who is not paid on commission. Your financial adviser should be qualified as a Certified Financial Planner (CFP) and make money only from financial counseling fees or annual fees that account for a small percentage (think 1 percent) of your assets.

You’re Jumping on the Band Wagon

Just because everyone else is jumping on a “hot” investment opportunity doesn’t mean you should follow suit. This decision can be a recipe for disaster if many people start to cash out at once, an activity which can cause the bubble to pop and your investment value to tumble rapidly.

Do your own research and take advice only from trusted experts rather than following the herd. Learn more about how to make money in stocks so that you can make smart, strategic decisions about your investments that aren’t swayed by peer pressure.

You’re Borrowing to Invest

Some investors are able to use a margin to increase their investment returns. However, this risky method is usually recommended only for investment experts. This approach makes it even harder to turn a profit since you’re also paying interest on your margin loan.

Unless you’re willing to take on big risks in the stock market, you should avoid borrowing money to invest. Any investment that you do take on should be one that you can buy outright. If you don’t have much cash available, consider more affordable options such as penny stocks or micro-investing apps.

An Investment Sounds Too Good to Be True

If you find yourself believing that a particular investment could be life changing for you, it’s time to step back and think. Are you being sucked in by unrealistic promises? Is the sales pitch you’re hearing filled with phrases such as “huge upside and zero risk” or “unbelievable gains?” If so, you may be on the verge of falling for an investment scam.

Don’t expect more than average stock market returns when you’re investing. If you’re being promised significantly more, it’s a sign that the investment is shady.

You Discover a Limited-Time Offer

One clever sales tactic is requiring investors to come up with the capital to invest in a short amount of time. However, reliable, trustworthy investments aren’t going to disappear in a matter of days. In this case, the pressure to invest quickly is simply a trick to get you to fork out the cash before you have time to reconsider.

Make sure you take time to research each investment. You should never rush to invest based on the idea that you’ll “miss out” if you don’t buy in immediately.

You want to be a careful, informed investor. Use the tips above to make sure that you don’t fall into a bad investment decision.