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The Red Flags of Investing
Sunday 23, April 2017

The Red Flags of Investing

LisaF

There are so many red flags in our everyday life which signal danger to us. The earliest citation for “red flags” in the Oxford English Dictionary is from 1602 and it shows that at that time the flag was used by military forces to indicate that they were preparing for battle. The  expression "to raise the red flag" comes from various usages of real flags throughout history. Red flags of various designs indicate dangerous wind and wave conditions for mariners. In auto racing, a red flag indicates a stop to the race due to dangerous conditions. In our present day we use red flags for different reasons and conditions. They are many red flags waving in front of us in our everyday life. These can occur on our roads when we see a car out of control and we need to stop and slow down to prevent an accident.  It also affects our lives when we feel unwell physically and ignore the signs of illness (red flags) to our peril, instead ending  up at the doctor’s office where we are told to make significant lifestyle changes because if we don’t we may get gravely ill or die.

Well today we are looking at the red flags of investing. A red flag with your investment can be an indicator of potential problems with an investment in your portfolio. It could be the negative news report on a stock or bond or the financial statements of the companies. There are numerous indicators used by financial advisors when purchasing an investment, likewise there are similar reasons to exit an investment. So let us look at a few of the red flags/ signs to watch for when we are investing.

Most times when we are introduced to an investment that says low risk and high returns, if it sounds too good to be true, it just might be that, too good to true. High returns are almost always related to high risk and this is an indication( red flag) that the investment must be thoroughly researched before diving in. Any business that promises substantial returns in a short time frame should make one wary. Always conduct detailed due diligence to assess the viability of a potential investment.

When you are being rushed to sign on the dotted line -that is a major red flag waving right between your eyes, do not allow your financial adviser, managers etc. to rush you to sign documents that are not fully explained to you. If you feel uncomfortable and you believe that after asking the prerequisite questions you are still unsure, go over the process until you understand, never sign without fully reading the fine print and make sure you understand the pros and cons of the investment. Investing your money is a serious decision and you should be crystal clear as regards  the investment you are about to enter in. Investing should always be done with consideration and time.

We should also beware of persons and complete strangers who offer up unsolicited investment advice and opportunities…. You should see the red flag in all its glory blowing endlessly in front of you. If you are approached by a friend or colleague who you know has limited investment knowledge, get more information before you proceed. Call your advisor to confirm that any investment worth your money must be registered implying that your advisor would be aware or it or be able to help you decide whether to invest. A point to note is that scams may come in the form of unsolicited investment offers so avoid offers like these no matter what.

Investment advisors must be professional, if an investment advisor is giving out “confidential advice, they may be actually deceiving you and their employer. Either way both put you at risk. It is not only illegal and unethical, it’s often known as insider trading which is punishable by law.

Often times many advisors come across as pushy and forceful, If you sense they are not taking into account your risk profile it may mean that they are not making there predefined monthly quota for the month and that makes them pushy which is not a good sign. If an advisor is pressuring you to invest, chances are there’s something going wrong.

Companies that are in trouble will try and convince you to invest your money way before you figure out why. They push  instruments that are extremely risky and are nowhere close to your time horizon and risk tolerance. Often times it’s a strategy to offload declining assets on their books. As an investor, it’s important to remember that you always have the upper hand and should never settle for anything less than the targeted yields.   

Another point to note is a very simple fact that no company in the world can guarantee profits. Any business that takes that approach and are willing to guarantee returns are probably looking for any investor that seems interested, this is a huge risk you are taking and most times it’s not safe to invest in such a company so be careful, avoidance will protect you from being caught up in a bad investment.

Be careful of investments that are advertised with most of the relevant information on the other hand excluding the most important point the yield on the instrument. It looks great however how much you will earn and at what cost is very important. There are often advertising investments which are misleading to the average investor.

Last but not least, a lack of paper trail is a red flag that can’t be ignored. Before committing to an investment by signing a contract, you should ask for the financial statement or see a graph of how the investment has been trending since inception. This helps you to better see the progress of the company and the investment  before you to commit to it. If there is no paper trail or documentation to peruse it’s likely the company may be recommending a risky investment and so you should ask for paperwork, legitimate financials and they should be happy to comply.

Any red flags you see, be patient and proceed with caution. Happy investing from Sterling!

 

Lisa Minto-Powell is the Manager, Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

 

 

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