When something sounds too good to be true, it probably is.
At odds with this old wisdom is a flood of investment information and recommendations to put your money where it supposedly will keep you safe and make you rich.
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The problem is, when you’re just starting out you may not recognize questionable information.
“Anytime you receive any kind of marketing communication pitching an investment, proceed with caution,” said certified financial planner Douglas Boneparth, founder and president of Bone Fide Wealth in New York.
Here are six things that should make you hit the pause button.
Recession warnings are starting to rumble again, so you’ve probably seen a worrisome headline or two.
Feeling anxious, you start thinking about selling.
“The entire premise of making a financial or investment decision because you feel a certain way is, in itself, a warning sign,” said Boneparth. “We typically don’t want to make our decisions based on our emotions.”
Don’t make your investing decisions based on interest rates or headlines, says Boneparth.
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“The very premise feels off key,” Boneparth said. If feelings are driving you to make an investing move, most financial planners would advise you to see how specific moves would impact your finances.
“Anything has the potential to have you make a bad or uninformed financial decision,” Boneparth said, “which in turn is likely not going to help you achieve your goals.”
You might observe something about a company that makes you think it would be a good investment. David Nelson, 29, noticed a lot of service outages from his internet and television provider. He read a recent financial report and did some research.
It seemed like a great chance to invest in a turnaround: a struggling company with a viable plan to become more profitable. Nelson figured he would buy low, at $1.72 for common shares and $18 for preferred shares. He invested about $6,000.
“The company purchased some Verizon accounts, and unfortunately the acquisition didn’t go as planned,” said Nelson, who lives in Florida’s Tampa Bay region. Service disruptions lost them a lot of customers, significantly affecting their share price.
He originally planned to hold on for at least two years. “But I freaked out when I saw the stock was down 30% or 40%, and I took the loss,” Nelson said.
Nelson’s advice: Do your research and be able to back up your position with facts. Don’t make decisions based on hope or emotion.
Things you don’t fully understand
Marc A., 40, learned a thing or two about investing when he made a quick decision in 2013.
Marc, who asked that his last name not be used, had missed out on a year’s worth of 401(k) contributions after changing the structure of his York, Pennsylvania, internet marketing company.
His advisor at the time told him that three-quarters of a $13,000 investment in an energy company would be tax-deductible. Natural gas mining would be a solid investment that would pay out.
Six years later, Marc says the returns have been disappointing. “The main lesson: Don’t invest in things I don’t understand,” he said. “So far, in more than five, six years we’ve been paid back less than $2,000 of the $13,000 we invested.”
He says he cannot sell the investment without going through the advisor, with whom he no longer works. “I’ve written it off as a loss mentally a long time ago,” Marc said.
Marc now takes a DIY approach to his money and runs a personal finance blog. “One of the positives was just taking the initiative to educate myself better,” he said.
“If a particular investment is too complicated to understand, it likely tells you all you need to know about getting involved with it,” Boneparth said.
The odds of getting rich from an IPO are unlikely.
First, Boneparth says, you have to take on a significant amount of risk. “Don’t invest your life savings in the hope that it will be Google or Facebook,” he said. “Most IPOs will not provide that same kind of performance.”
“If you get an email or watch a commercial that millions of people are reading, do you think you’ve come across something so unique you’re going to capitalize on it?” Boneparth said.
The typical claim: “The world is crashing, and you’ll need a hard asset like gold to get yourself through the fallout.”
The sellers of some investment products know that people feel frightened when interest rates fall or the stock market shows some volatility, Boneparth said. “But this is predicated on something that does not fit good financial planning or smart investment decisions,” he said. (See above: Your emotions)
Several claims about gold — that it’s a safe haven or a hedge against inflation — have been debunked. “It has risks associated with it like any other asset,” Boneparth said.
The amount of gold you might hold in your portfolio — recommendations say 3% to 5% — is so small as to make it almost meaningless.
“A $1 million portfolio allocating 5% to gold would mean $50,000 in gold,” Boneparth said. “If you have $100,000 and allocate 3%, that’s $3,000.” Ask yourself if that would be a meaningful way to dampen volatility.
Bold claims and random recommendations
Email pitches and internet ads turn up a lot of claims and promises. Here are Boneparth’s answers to supposedly rock-solid investment statements.
Claim: “These alternative categories, including real estate investment trusts, master limited partnerships, business development companies, can get you upwards of 8% on income.”
Boneparth’s response: “Throwing out an attractive return on its own as a form of marketing is a bit icky. Regardless of what any investment might return, there’s always risk you need to take to earn that return, which is why it’s imperative to understand how the investment fits into your overall portfolio and financial plan.”
Claim: “I recommend looking at high-income, pass-through securities.”
Boneparth’s response: “Making an investment recommendation without first understanding a client’s particular financial situation and goals is generally bad investment policy.”
Claim: “It can give investors the option of higher yield that doesn’t exist elsewhere in the market.”
Boneparth’s response: “Maybe it can, but there’s no free lunch, and making broad sweeping comparisons to the rest of the market is skeptical at best.”