Investment Advice - How To Recognize
And Avoid Risky Investments
The patterns of any particular investment
will detail the relative risks and rewards undertaken with
each investment. Risks can be defined as "the chance or
possibility of injury, damage or loss." Risk focuses on
the future and our ability to forecast that future. In turn,
the ability to predict the future is largely dependent on
what you've learned from the past. The best you can do is
to study the record and draw on experience - your own and
that of others.
On the surface, the relationship
between risk and return seems straight forward. In general,
you will find that risk and return move in the same direction.
In other words, if you accept a higher risk, it is possible
to achieve higher returns. High-risk investments invariably
promise a high return. But equally important, where it is
possible to win big, you can lose big. And the odds are always
with the "house" (the provider of the risk-return). If all
it took to create instant wealth was assuming high risks,
then you could assure yourself of millionaire status simply
by attending the race track every day and betting all your
money on the long shots!
Investment Advice - Avoiding
Risky Investments
No other advice on investing
is complete without a few important warnings. The investment
industry has its share of unscrupulous people who, at best,
will mismanage your investment, and at worst, steal you blind.
They'll come at you with Ponzi schemes, pyramid deals, real
estate that's never been any good and never will, and telephone
offers or email offers of stock or funds or oil leases or
gems or precious metals, etc., that offer large and easy returns
with no risk.
These salespeople play on
a universal desire to "get something for nothing" and to "get
rich quick." Most of us are not immune to a good pitch. However,
by just taking the simple precaution of thoroughly investigating
an investment offer yourself or through a trusted accountant,
lawyer, financial adviser, etc., you'll greatly minimize the
risk. The best caveat to bear in mind is: "if it sounds too
good to be true, it probably is."
Investment Advice - Watch
out for the Ponzi and Pyramid.
In their eagerness to make
a lot of money quickly, many people and millions of dollars
every year are sucked into Ponzi schemes and pyramid deals.
In the former, expect to lose your money, and in the latter
there's a very high probability that you're wasting time and
money.
In the 1920s Charles Ponzi
invented a simple, alluring investment fraud that's still
practiced today. In its simplest form, a swift-talking promoter
will ask you to give them, say $5,000 to invest in a spectacular,
usually secret, investment to which the promoter has access.
They promise a spectacular return of, say 20 percent in three
months.
At the end of the three months,
they offer to deliver $6,000 (your investment plus your return)
but suggests that you let it all "ride" for an even better
return in another three months to six months. What you don't
know is that there is no investment. The promoter is simply
gathering as much as they can from as many suckers as they
can convince. Then they have to pay Peter, it comes from Paul.
Eventually, the promoter disappears with the bulk of the "investment"
money.
A Pyramid scheme is an illegal
type of multilevel sales- except usually there is no product
sold. You are asked to pay ($500, $1,000, $10,000 etc.) to
become part of the pyramid. The amount of your payment to
the promoter determines your position level in the pyramid
and "allows" you to promote the pyramid to others. The more
people you bring into the pyramid, the higher you rise and
the closer you get to the big payoff.
Investment Advice - Financial
Risk
For most investors, financial
risk is the most immediate one. It centers on the simple question,
"If I put my money into this investment, will I at least get
my money back?" Your best protection against financial risk
is to explore any investment to the point where you understand
the factors that risk and/or secure your principle. When you
buy a common stock, for example, the financial risk is tied
to the credit and operating histories of the company issuing
the stock. So you analyze the firm's financial capacity (ability
to generate income). A firm that can't pay its debts or has
a low financial capacity and a comparatively high financial
risk. A company with earnings high enough to pay fixed costs
many times over is thought to pose a lower financial risk.
Generally, such vehicles as
certificates of deposit, commercial short-term paper, federal
savings bonds and Treasury securities are considered of low
financial risk. Whenever you evaluate
the risk inherent in a given investment, ask yourself:
1. What kind of risk is involved?
2. What is the extent of this
risk?
3. Is the potential return
worth this risk?
By first learning a set of
criteria with which you can evaluate an investment, and then
considering those objectives in light of your personal factors,
you've begun acting like an investor.
| Authors Details: Investment Advice
- Steven Boaze Web
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