Investment Warning Signs & Red Flags – Learn how to avoid bad investments
Learn About Warning Signs That Can Help You Differentiate Between Good and Bad Investments
Avoiding bad investments is the first step in the creation of wealth. It can take years for a portfolio to recover from a few investments that could have been avoided in the first place. Fortunately, there are several investment warning signs and red flags to help you spot the investment products and stocks you should avoid.
A good investment might generate returns of 15 to 20% a year. Unfortunately, bad investments can lose far more than that very quickly. So even if you get your market timing right on most of your investments, a few bad apples can erase all those gains. Good investing involves smart asset allocation, managing portfolio risk and patience.
Certain types of investments should be avoided regardless of your risk tolerance. They just aren’t worth the risk because, besides losing money, they will create stress and you will end up wasting time on them. Therefore, you should be on the lookout for obvious investment warning signs.
- Promises of high returns
- Moving the goal posts
- Delayed redemption
- No third party involved in administration of assets
- Lack of liquidity
- Dividend cut
- Delayed release of results
- Changes in accounting policies
- Executive turnover
- Insider selling
- Rising high debt
- Low ROE
- Valuation very low
How to get out of bad investments
Occasionally you may find yourself stuck with bad investments. Sometimes you may miss investment warning signs, or there may be none. So how do you get out of a bad investment? It’s a good idea to get some independent investment advice from someone who really understands the type of product or security. The better informed you are the better.
In the case of a stock, you need an honest assessment of the value of the stock and whether the value is likely to rise or fall going forward. If you can sell for anywhere close to what the stock is worth, you should. There’s a lot to be aid for moving on to the next investment opportunity rather than dwelling on a bad stock.
If the investment is a product like a fund or a trading account, there may be a legal route to follow to recover your money. But before starting down that route find out exactly what it might cost and how long it’s likely to take. It may not be worth the time and money. There is no point throwing good money after bad money. Try not to be emotional. Focus on recovering what you can, rather than trying to recoup losses.
Reaching your investment objectives can take patience and hard work. A few bad investments that could have been avoided can make the process that much more difficult. By looking out for the investment warning signs and red flags listed in this article you can make things much easier and avoid a lot of stress.