Here at Ideal Money, we’re all about investing. Using that money you already made as a tool to make more money and watching your net worth grow and grow and grow. However, investing can either help you or hurt you. And if you aren’t careful, you can watch all your money disappear overnight from making bad investments. I know; I’ve been there!
And even though even the smartest investors in the world sometimes make bad moves and end up losing a ton of money, it’s still best to avoid bad investments whenever you can. So, in this article, I’m going to go through 13 signs that that investment you’re about to make is a bad one and hopefully save you from losing a ton of cash.
These are the 13 warning signs of a bad investment. Unlucky number 13! Let’s go!
#1: You Have to Borrow – Debt Risk
This first sign of a bad investment is, well, if you can’t afford it. That’s right, I’m talking about debt! If you can’t afford to make an investment outright, you probably shouldn’t do it at all. Big-time traders trade on the margin, meaning they borrow money to leverage the effects of their trade. But, unless you’re a super experienced investor, don’t borrow money to invest in stocks. You’ll just end up in debt.
Choose something you can afford and build your money the old-fashioned way. So, don’t follow those margin traders. And you know what? Don’t follow the crowd either.
#2: Everyone Else Is Doing It – Don’t Be a Follower
As a rule of thumb in investing, if everyone else is doing it, you probably missed the boat already. Don’t make an investment just because you’re constantly hearing about it from everyone on Reddit or whatever. When you’re investing, it’s all about staying ahead of the curve. And if everyone else has already made an investment, you’re behind the ball.
Instead, do your research and focus on the fundamentals of stocks or whatever it is you’re buying. Speaking of timing, don’t ever invest in something that’s a limited-time offer.
#3: You Have to Buy Now – Limited-Time Offers
Rushing into an investment is never the right thing to do, but that’s what limited-time offer deals are specifically intended to make you do. If someone is pushing you to buy a stock “before it’s too late,” then it’s almost definitely a scam that’s going to cost you a bunch of money.
If an investment is good, it will probably still be good in a week, or a month, or even a year. And that kind of leads us into the whole idea of investing when something’s at the bottom of its curve, which is another mistake you should try to avoid.
#4: You Think It’s Hit Its Floor – There’s Room to Lose
Some people look for stocks that are falling fast so that they can get a good price on them and make money when they turn around. But that only works if it ends up turning around! Just because something has dropped super far in price doesn’t mean it can’t go lower.
In the industry, buying a stock that’s dropping rapidly in price is referred to as trying to catch a falling knife. Why do they call it that? Because you can end up getting hurt. Bad. You also have to be wary of stocks that are rising really fast, particularly when their company isn’t growing at the same rate.
#5: Stock Is Growing Faster Than the Company – Pop Goes the Bubble
Alright, so the fact that a stock is rising in value is typically a good thing. However, a stock’s price should be driven by the company’s earnings. So, if you go into a company’s financial statements and see that their earnings are staying the same or even falling, while their stock price is going to the moon, that means that there’s a big bubble that’s probably going to pop sooner or later.
Savvy investors look at a company’s price-to-earnings ratio, which basically shows the relationship between stock price and income. So, if that price-to-earnings ratio is super high, it just may be a recipe for disaster. You know what else is a disaster? Getting trapped in a money pit that you can’t get out of.
#6: You Can’t Get Out – Financial Prison
So, there are certain types of investments that require you to hold them for a set period of time before you get out. And if you do want to get out, they slap you with a giant fee. Variable annuities, for example, will sometimes charge you 5% to 9% of your investment if you sell them off too early. That means if the value of that annuity goes down and you want to offload it before your losses get even worse, you’re going to have to pay even more money in selling fees, making an even worse impact on your wallet.
Variable annuities aren’t always bad, though, or else they wouldn’t exist. But, in general, if you don’t have the freedom to get out of an investment whenever you want, you probably don’t wanna get into it in the first place. And sometimes those variable annuities and other money pits sound pretty good on paper. A little too good if you ask me…
#7: It’s Too Good to Be True – Be Realistic
If an investment sounds too good to be true, it probably is. Don’t get fooled into thinking it’s your lucky day because someone came around offering you the opportunity of a lifetime, saying that this investment has “huge earning potential and absolutely zero risk!” Every investment carries some risk, and the greater the potential reward is, the greater that risk is. That’s something that’s just never going to change.
So, accept that fact, be realistic about your expectations, and ask yourself whether something sounds too good to be true before you invest in it. If it does, that person’s probably trying to scam you. And even when someone gives you a tip on a stock or something, and doesn’t ask you for anything in return, it’s still probably better to walk away.
#8: Someone Gave You a Tip – Trust Yourself
Just like that guy who brags too much and doesn’t have anything to back it up, if a stock has people who are promoting and calling it the next big thing, it’s probably compensating for a lack of substance. Instead of trusting that tip that you got from your cousin or that guy at your office, do your own research, trust your own brain, and never invest blindly on a tip that you got from someone else.
So, when deciding whether to invest, it’s probably better not to listen to your peers. However, when it comes to looking at a stock’s performance, you absolutely want to pay attention to its peers.
#9: A Stock Is Trailing Its Peers – Last in the Class
The price of a stock typically will move up and down with the market as a whole and, in particular, with the other stocks in its industry. So, if you’re looking at a biotech company, look at the biotech industry as a whole and other companies in that space to see what their stock prices are doing. If the stock you’re looking at isn’t growing as fast as the rest of the industry, it could mean that the stock is undervalued and that it’s a good buy.
However, it could also mean that the company is being outperformed by the other competitors in the industry and that that company is doomed for bankruptcy in the near future. Generally, if a company can’t compete in its industry, you don’t want to touch that stock with a 10-foot pole. So, obviously, losing money is not the objective of investing. But, we have to get even more specific about what our objectives really are and if a potential investment is going to align with those objectives.
#10: It Doesn’t Align With Your Objectives – What Your Wallet Needs
Before you go throwing money at any investments, you need to think critically about what you want out of an investment. Do you want to grow your wealth over a long period of time, like for retirement, for instance? Or do you want a steady stream of income that can help you get your bills paid for the rest of your life, like a dividend stock? And it’s not as simple as just one or the other. Many investments offer a mix of these two strategies.
So, before you dump a bunch of money into an investment, look at what your financial needs and goals are and consider them when choosing where to place your money. And, on the same note, you need to look at your own risk tolerance, as in how much you’re prepared to lose.
#11: It’s Too Risky for You – Safe Gambling Only
So, if you see a guy at a casino who gets caught up in the neon lights and throws down his bottom dollar on the craps table only to realize that he can’t pay for his hotel room, you should be thinking, Hey, that guy really exceeded his risk tolerance. And the same thing happens in investing. So, think about how much you can afford to lose, and if investing in a stock could potentially mean losing more than you can afford, don’t do it.
Always consider the worst-case scenario and where you would be financially if that occurred. Too risky for you? Walk away. But wait, what if an investment worked for you before, and made you a bunch of money, Does that mean it has no risk? And will make you money again? Hell no!
#12: It Worked Before – It Might Not Work Again
Just because you invested in something in the past and it made you money doesn’t mean it will end up doing the same thing again. The economy is a constantly changing thing. And something that may have been a great investment a year ago, may be a terrible investment now. Of course, I’m not saying that you should never go back somewhere you’ve been before. If you do your homework and decide that that investment is still a good one, go for it. But don’t invest in something blindly simply because it worked out in the past.
Are you noticing a theme here? Do your research, people! And that leads me to the final warning sign on this list. Unlucky number 13. You should never invest in something you don’t understand! Sounds like common sense, right? You’d be surprised…
#13: You Don’t Understand It – Big Words Are Confusing
So, first of all, you should never make an investment that you don’t understand, and I mean fully understand. Before you go buying a stock, you should read everything there is to read about that company, look through every indicator of their past performance, and decide in your own mind whether or not it’s a good investment.
But, second, if you find yourself researching an investment and you don’t understand some of the complicated jargon involved, don’t worry. It doesn’t mean you’re dumb, but it does mean that you should walk away from that investment. Believe me, there are other investments out there that are going to be just as good and far easier to understand.
Just because something is complicated doesn’t necessarily mean it’s better. Stick to what you can understand and do as much research as possible and you’ll give yourself the best chance of having a fruitful investing career.