Five ‘Red Flags’ of Investing

People often think you should simply find a fantastic investment, put all your money in and get rich.

Sadly, this is the opposite of wise investing. There’s no “getting rich quick” only “getting rich slow”.

A key skill to develop is the ability not to invest in the wrong things.

The world’s full of people wanting your money. What easier way to get it than to ask you to give it to them – for nothing!

This is why, if you see anything similar to the below in a potential investment, you must think very hard indeed before going ahead.

1. Promises of High Returns

When someone promises to double your money in 3 months, run. It’s the classic opening pitch of a financial fraudster. The grand-daddy of them all? The Ponzi scheme, where investors’ money is stolen as the scheme attracts money through promises of overly high returns – the oldest trick in the book.

If you see an offer of interest that is significantly higher than others in the market, ask yourself if it’s real. Consider ‘Icesave’ the Icelandic bank, which offered 3-4% more interest than other UK banks before the credit crunch – and remember, it was the first to go broke.

If anyone offers you a deal too good to be true, treat it with the highest scepticism - no matter who they are.

2. People have already made a lot of money in this type of investment.

Buy at the bottom, sell at the top – remember this golden rule of investing.

Anyone that has bought property at the top of a boom will tell you, they bought in because they though the good times would continue to roll - everyone else was doing it!

The popularity of an investment, (say Apple over $700 a share), is in fact a contrarian signal - the rise is nearly over, the top of the market is here! Never buy into popularity when you invest.

3. People with no idea are recommending you this investment.

If your cab driver tells you property’s the thing to invest in, it likely isn’t. A barman tells you bonds are hot? Buy shares. If your hairdresser has bought Apple stock, short it...

Sadly, ‘normal’ folk are usually sucked into investments only when a bubble is underway. It’s a shame but your cab driver and hairdresser know nothing about investing, they didn’t do any research, they are just excited that they are going to get rich. Sadly they aren’t.

This is, of course, obvious, but it’s word of mouth that is the mother of investment booms. Be very cautious before you jump on the bandwagon.

5. You can’t easily get your money back.

The trouble about a lot of exciting investments, sold with glorious promises, is that once your money has been put in, you can’t easily get it back again.

This isn’t necessarily by accident - bad guys last longer if people can’t pull money out quickly.

Technically, an investment you can’t easily cash is called “illiquid.” All sorts of financial dramas and frauds are linked with a “lack of liquidity” or “unexpected illiquidity.” That’s because liquidity means cash. When cash goes missing, it tends to be put down to a lack of liquidity.

Sadly, if you cant sell your investments easily you are at the mercy not only of the market, but of others.

When you look at an investment consider its liquidity I.e. how fast you can turn the value of the investment into cash. The more gates to keep you from realising your investment, the more scared you should be.

You should, of course, build your own list of “red flags”.

A loss avoided is a profit in disguise.

Clem Chambers (www.clemchambers.com ) is CEO of the leading financial information website ADVFN.com and author of Amazon best-sellers, ‘ A Beginner’s Guide to Value Investing’ and ‘101 Ways to Pick Stock Market Winners’. Opinions expressed here are his own and do not reflect that of Gulf News.