Photo: Marinwib. Source: Pixabay
Confidence is good. It helps us get up in the morning. We can confidently expect the sun to rise and roosters to crow. If you aren’t confident in the fishing, you’ll never head out and you’ll never catch anything. But when it comes to investing, confidence can be our enemy. It tempts us to do stupid things, investing with our hearts and instead of our heads. And this encourages crooks to try to scam us.
It’s not just Nigerian wire-transfer or bogus cut-price products on the internet. It can be private company transactions, penny-stock offers, and even mutual funds – an otherwise legitimate investment that gets trussed-up with management fees, 12b-1 fees, and financial planning fees. All fees should be disclosed in plain language. Ask your advisor how they get paid from your business.
Every investment carries risk. You want to know what can go wrong, how badly, and how soon. Legitimate investments have a lot of fine-print devoted to risk factors. Your advisor should explain this. While you’re there, ask to see the legal documents so you can run them by your lawyer. (Hint: you don’t really need a lawyer to ask this.)
Additionally, complexity is your enemy. The more convoluted the structure, the less likely any return will find its way back to you. If an advisor can’t explain an investment on the back of a napkin in crayon, it’s probably too complicated.
Public Domain. Source: Wikimedia
If you don’t get satisfactory answers, walk away. There will always be another opportunity. Remember: if it sounds too good to be true, it probably is. And the only sure thing about your money is that someone else wants it.
Douglas R. Tengdin, CFA