AARP Eye Center
Like everyone, I’ve made my share of investing mistakes. When I review portfolios and talk to clients, I see some recurring themes and warning signs. These typically aren’t fraud, so don’t expect a financial regulator to bail you out. Here are some of the more significant red flags, followed by what you can do to protect yourself.
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1. The promise of high returns and low risk
One investment I recently reviewed claimed to offer “a 7.5 percent+ safe and consistent passive return.” With both stocks and bonds causing pain right now, who wouldn’t want in on that? As much as I certainly would, common sense tells me that if there was such a vehicle, institutions such as pension funds would be clamoring over it so they could invest billions of dollars. They wouldn’t need my money.
Normally, the safer the investment, the lower the return. But there is one exception: A U.S. Government I-Bond, which yields 9.62 percent for the next six months. Its yield is linked to inflation, which is at a 40-year high.
2. Time is of the essence
You are told some version of: “Unfortunately, this is a limited time offer, as the 10 percent bonus is only good though tomorrow.” What’s happening is that the person selling you this product is trying to get you to think emotionally rather than rationally.
In his book Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman describes our two systems of thinking. System 1 is fast, intuitive and emotional; System 2 is slower, more deliberative and more logical. The limited time offer tactic is having you make a decision before your slower but more logical system of thinking has time to kick in. And this tactic isn’t restricted to investing. Advertisements often urge the buyer with wording like “This is a limited time offer and only available while supplies last — act fast before it’s too late.” With investments, go with System 2: Use your deliberative, logical thinking and put your emotions aside.
3. The investment is complex
Better investments are typically simple and easy to understand. Complex investments often come with a thick disclosure document — sometimes hundreds of pages — that you must sign, indicating that you read and fully understood it. I’ve actually never met a financial rep who understood what they were selling, much less a consumer.