Beware of investments on social media offering high returns within a very short period. Only invest if you’re prepared, and can afford, to lose your money. Find out what you need to know before investing.
If high returns are being promised or even suggested, then this means there are higher risks associated with the investment.
Here are five important questions to ask yourself before you invest:
1. Am I comfortable with the level of risk?
All investments carry some element of risk but the higher the return, the higher the risk. So, if you are considering an investment that offers high returns, ask yourself if you can afford to lose all the money you invest.
It may not always be clear what level of investment returns might be considered ‘high’. A good place to start in comparing possible rates of return is to compare your investment opportunity with the best cash savings rate you can find. You will see that the return on these products is much lower, and by default, the risk is significantly less.
As a rule of thumb, consider limiting yourself to not investing more than 10% of your net wealth in investments where there is a real risk of losing a significant part, or all, of your investment. Your net wealth is your assets minus any debt you owe.
No investment is without risk. If you’re offered a high rate of return it means your investment carries higher risk. You should think very carefully before investing, and not invest any money you can’t afford to lose in full.
2. Do I fully understand the investment being offered to me?
Make sure you take steps to fully understand what you are investing in and what different types of risk are involved. For example, an important question to ask is how ‘liquid’ is the investment? Can you get your money out when you need to? Is it easy to sell the investment on if you need to? Would people be willing to buy the investment from you? If you wanted to cash out, would you need to get the investment provider’s agreement?
High risk investments are often complicated and may have complex structures that are hard to understand. For example, with mini bonds, your investment may be lent to, or invested in, a different company from the company that issued the bond. Your investment may also be subject to various fees and charges taken by multiple parties. This may affect the ability of the investment to deliver advertised high rates of return.
High risk investments are more suited to people with experience in financial markets. If you cannot afford to lose your money, or consider yourself to be a less experienced investor, or if you are unfamiliar with the type of investment offered, it’s wise to seek independent financial advice before deciding to invest.
3. Am I protected if things go wrong?
The reality is that with high risk investments, there is no simple answer to whether investors will be protected if things go wrong.We have seen examples where consumers have mistakenly assumed or been led to believe they had access to compensation if they lost money on their investment. It is important that you look in to which protections, if any, might be available to you before you invest.
4. Are my investments regulated?
Before investing, check to see if the investment scheme is regulated by investment agencies such as Securities & Exchange Commission (SEC)
5. Should I get financial advice?
You should consider getting financial advice if you need help understanding the nature of the investment and the risks involved. An adviser will be able to help you create a plan to meet your goals and recommend the right balance of investments for your risk appetite. If you do opt for an adviser, make sure they are regulated by the (SEC).
Be wary of investment scams
Promises of high returns can often be a sign of a scam. This is particularly the case if the risks are being minimised or hidden in the small print. You should be especially wary if you’ve been contacted out of the blue and pressured to invest quickly. Scammers usually contact their vivtims on social media, by email, post, word of mouth or at a seminar or exhibition. The safest thing to do is reject all unexpected offers.
The risk of being scammed can still be high even if you have approached the firm yourself following web searches or via an advert.