7 warning signs of a bad investment

In the world of investing, people often look to gain an edge or get rich quickly, but that drive can push them to bad or even fraudulent investments. For instance, they might opt for an investment with excessive fees or a stock without knowing much about it, as they’re drawn to fast money.

Even if an investment seems attractive on the surface, it may end up being bad news, and some investments you may not be able to escape from so easily, either. If the investment you are considering has any of these warning signs, it may be best to steer clear from the start.

7 signs an investment probably won’t work out

1. You have a sense of urgency to buy, buy, buy

It may be easy to become enamored of a stock when it’s rising. It seems to go up week after week, so you may feel compelled to buy quickly to ride the momentum. But this sense of urgency is rarely a good sign. High-flying stocks can turn around just as quickly, leaving you with way less than you invested. Good stocks tend to run higher for years, if not decades, meaning that if it’s truly a great opportunity, you can buy after you understand the investment better.

Ensure the investment aligns with your goals and risk tolerance first. Even if you miss this one, there will be plenty more investment opportunities down the line. If it is such a great long-term opportunity, you won’t have to invest all your money right now, anyway. Instead, you’ll be able to use dollar-cost averaging and buy more over a longer period.

2. An investment advisor pressures you to buy it

If you ask for help from an investment advisor and they go for the hard sell on a particular stock, it might be a red flag. While many investment advisors are fiduciaries, meaning they must act in their client’s best interests, many other so-called advisors are salespeople in disguise.

Some work on commission, so they might be incentivized to push certain investments, even if they aren’t what’s best for the client. So it’s usually best to work with a fee-only financial advisor and check that they are a member of the National Association of Personal Financial Advisors or a similar organization. (Here’s how to find the right advisor for you.) In addition, do your own research on the investment and ensure it aligns with your goals. That’s true regardless of how your advisor is paid.

3. The investment is “the next big thing”

You might hear about a stock that is the “next Netflix” or something along those lines. Usually, the reality is much less exciting. But hucksters will throw these sensational lines around to convince others to buy into a particular investment. There might be a next Netflix or a next Amazon, but these stocks are extremely difficult to predict. Even if someone could predict them, it’s unlikely you would hear about it from a stranger on the internet.

Instead of jumping into these investments, work with a fiduciary financial advisor to develop a strategy that works for you. Then, if you’re still interested in that next big thing, run it by a trusted investment advisor and see what they say.

4. You don’t know anything about it

Some investments might seem attractive if a bit opaque or difficult to understand. For instance, you have probably heard of people making millions by investing in cryptocurrency. But there are probably a thousand crypto horror stories for each of those success stories.

One problem with crypto investments is that people often dive in without knowing much about it. Crypto and other alternative investments may not be a bad choice if you know what you’re doing, so educating yourself first is important. If not, you could be setting yourself up for failure. And that’s true whether you’re buying highly speculative crypto or more established investments such as index funds. Know what you own.

5. You’re told it’s risk-free

Let’s get one thing out of the way: all investments carry risk. Even relatively safe investments, like U.S. Treasurys or CDs, are not entirely risk-free. Suppose someone tells you an investment has guaranteed returns of a certain percentage or they say it carries no risk. This person is either dishonest or they don’t know enough about the investment, and neither is a good sign. This type of pitch is often a sign of an investment scam, so it may be best to avoid it entirely.

6. It doesn’t align with your goals

Generally, an investment is only a good fit for you if it aligns with your goals. For instance, while a diversified portfolio of stocks has been a great long-term investment, though with big declines from time to time, it may not be right for retirees, who typically need a stable source of income. Maybe you can’t handle seeing your investments drop overnight or you will be retiring soon and can’t handle this amount of volatility. So the investment has to fit your needs.

No matter how great the potential returns are, it’s probably not right for you if it doesn’t align with your financial goals. It’s important to have an investing plan and stick to it.

7. The investment sounds too good to be true

Every now and then, an investment comes along with results that sound too good to be true. But as the expression goes, “If it sounds too good to be true, it probably is.” If you hear about an investment and can’t believe something like it could be possible, it probably isn’t possible. There are exceptions, but those are few and far between. More often, an empty promise will leave you rife with regret. Instead, you should opt for investments that align with your goals.

One of the best proven wealth-building strategies is to buy an S&P 500 index fund and then add to it year after year. In fact, it’s what legendary investor Warren Buffett recommends.

Bottom line

Investing can be a tricky game. Often, people try to beat the game by searching for investments that give them a leg up over their peers. While these opportunities might exist in some cases, it’s more likely that what you’ll find is a bad investment, and you’ll end up even further behind on your investment goals such as a financially secure retirement.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.