How To Spot A Dud Investment
There are two types of dud investments:
- Absolute rubbish that was bad from the start – possibly even fraudulent (there are always a few of those around).
- Investments that are perfectly good in principle but, for one reason or another, perform badly for a time.
The answer to dealing with the second type – investments that don’t do so well for a while – is to make sure you don’t have all your eggs in that one basket. That way, while one does badly for a while, the others should hold your portfolio steady until the badly-performing one picks itself up (or doesn’t in some cases). Many stock market investments will go up and down over the years but if you have invested in a nice cheap tracker fund, your money is likely to increase gradually over time if you leave it for long enough.
As for the first type, sadly, there’s no fail-safe way to spot a loser. If there were then wealth would be much more evenly distributed around the world. However, there are some pretty sound principles to keep in mind that will at least protect you from the very worst ‘investments’ and help you mitigate the effects of the not-so-good ones. Here are my top tips for protecting yourself from the worst ones:
- Always keep in mind that ‘if it sounds too good to be true it probably is’ when you read or hear of amazing, easy-money schemes that are ‘guaranteed’ to make you rich.
- The more the hype, the more you should worry. Big ads on radio, on the Net or even through word-of-mouth usually mean a dodgy idea that you should avoid.
- Don’t go to investment seminars that are run by individuals or companies with a vested interest. Property seminars run by development syndicates who want to get you to invest in their portfolios, investment seminars run by fund managers or people trying to get you to sign up for an expensive series of investment classes should be avoided totally. These are just sales events aimed to get you into a closed room so that they can brain-wash you into handing over your cash.
- Ignore all ‘tips’ from friends down the pub, your brother-in-law’s dodgy mate, someone your mum met at the hairdressers or even your best friend who should know better. If you’re really interested in what they are suggesting then do your own research, talk to people who genuinely know and then make up your mind.
- Anything that promises returns of more than 10% a year (particularly those that guarantee it) should be approached with extreme caution. They are highly likely to be bogus. It is certainly possible to achieve much more than 10% a year with some investments – Warren Buffet’s company Berkshire Hathaway made huge average annual gains of 20.3 % between 1965 and 2008. However, nine times out of ten, anyone trying to sell you a product that they say will bring in more than 10% or more per year is a liar and a fraudster.
- Watch out for new investments connected to whatever is the fashionable asset class at the moment. For example, during the property boom all sorts of funds and seminars connected to residential and commercial buildings were peddled and far too many punters lost a whole lot of cash through them.
- Pretty much anything that your bank is trying to sell you should be regarded with the utmost suspicion. This goes for all financial products, not just investments. If your bank tries to get you in for a ‘consultation’ always say no. It’s simply a sales talk and if you are naive enough to go, be prepared to come out having had your pocket picked.
- Any schemes you find on the Web where there’s one long web-page with big headlines blaring “I made $30,000 in one week!” or similar. These are bogus and laughable at best.
- Anything that is suggested to you over the phone by a cold-caller from a so-called investment company with a ‘dead-cert’ investment product. This is likely to be a boiler room scam so if you get one of these calls just put the phone down, or, better still, tell them to wait a moment, put the receiver down on the table and go off to make yourself a cup of tea, wash the dishes, do the ironing, read a book, get married and do whatever you like until the caller realises that he’s been had.