It’s a universal truth of money, indeed of life. “When something is too good to be true, it usually is.” Anyone who has been sweet-talked into an investment that promises to produce magical returns, buck the stock market trend or be virtually risk-free while offering a high yield has ignored this truth.
The problem for investors is figuring out when something is too good to be true. In most areas of life it’s easy to spot a shady pitch. If someone offers you a car that runs on water, a potion to grow hair on a shiny pate or a rose that blooms year round and laughs at black spot, aphids and powdery mildew you’d probably say, “Yeah, right!”
But when ads, blogs, experts or advisors present an investment that appears to do the impossible, it’s not always easy to know if you’re being sold a bill of goods.
Too-good-to-be-true investments fall into two categories: downright scams and complex, risky instruments few can comprehend.
The former usually presents the most obvious red flags; however, both of them have the same impact. They separate you from your money by using confusing jargon coupled with pie-in-sky performance promises.
Generally you can steer clear by ignoring anything that doesn’t make sense. “I’m no expert,” you might say. “How do I know?”
Trust me, you know. But you have to listen to your gut.
For example: an investment promoted as incredibly safe with a return of eight per cent annually, doesn’t make sense. Incredibly safe investments with today’s ultra-low interest rates are returning less than two per cent annually unless you are talking about very long term government or investment grade corporate bonds. And they aren’t safe as houses because locking in for a long period when interest rates are low raises your investment risk.
Another example: an investment that promises to outperform the market consistently doesn’t make sense. Nothing and no one beats the market consistently – not even Warren Buffett.
And here’s one more: anything that offers a guarantee plus a high rate of return doesn’t make sense. How can anyone guarantee that? You already know the stock market can be volatile. You’re aware that world economies are uncertain and interest rates are low. These situations make it highly unlikely you’ll receive a high rate of return, never mind a guaranteed one.
I am certain that you know the truth of the above three examples. In fact, most people understand far more than they give themselves credit for. Invariably when people tell me they’ve made a bad financial or investment decision, they say they were uneasy or uncertain beforehand.
That’s your gut talking. Listen carefully. Your money will thank you.