Avoiding Inappropriate Investments
If a deal seems too good to be true, it probably is. You'll need to keep your eyes open and in search of red flags in order to avoid an investment that could cost you.
It's essential to avoid doing business with dishonest salespeople selling fraudulent investments and those who pressure you for immediate decisions by insisting that an opportunity will evaporate. It's equally important, though often even more difficult, to decide whether a legitimate investment product is right for you before giving up any of your hard-earned cash.
In some cases, the way in which investment products are sold may be a problem. Some salespeople offer investment seminars—with lunch or dinner—at a hotel or other public facility, focusing on financial or retirement planning. Others promote living wills or trusts. Some seminars can be educational and useful, but many are primarily high-pressure sales pitches.
If you attend this type of seminar, it's unwise to buy anything there. And you shouldn't reveal detailed personal or financial information, such as your Social Security number. If you want to follow up on any of the ideas, contact the seminar leader later or, probably wiser, work with your own broker, adviser, or on-base resource.
Certain types of investment products may be legitimate, but not right for most investors, including you.
OTC stocks: Shares in companies that aren't listed on a major stock market like the New York Stock Exchange or the Nasdaq Stock Market are called over-the-counter, or OTC, stocks. Some large international company stocks are traded OTC. But many OTC stocks are small and trade infrequently. Some issuing companies are not registered with the SEC, which is legal but means there's limited information publicly available about them. Both factors make these stocks especially risky because you may not be able to sell if you want to or find out what you need to know to make an informed purchase.
Penny stocks: These are a specific type of OTC stock that sells for less than $5 a share. Some penny stocks may provide big returns over the long term, but many turn out to be worthless. Penny stocks are often falsely promoted to unsuspecting buyers who are led to believe they're getting a bargain.
Investments with high fees: Many investments charge annual fees to cover management expenses and sales charges to compensate sellers. Some also charge fees if you sell or withdraw within a restricted period. You probably can't avoid fees entirely, but you should stay away from investments whose fees are higher than average for the type of investment it is.
Pay particular attention to the expense ratios and sales charges of annuities and mutual funds you are considering. Some states have mutual fund fee calculators on their securities regulator websites. You can also find one on the Financial Industry Regulatory Authority (FINRA) website.
Investments with limited liquidity: An illiquid investment can't be easily converted to cash. One example is a limited partnership, which pools people's money to invest in real estate or other ventures. Limited partnerships are not publicly traded, so if you need your money, you could have trouble finding someone to buy your portion of the partnership at the price you want. In fact, selling may not be allowed even if you could find a buyer.
Callable certificates of deposit (CDs): Unlike most conventional bank or credit union CDs, which mature within six months to five years, callable CDs may not mature for as long as 10 to 30 years. In that period, your money may be inaccessible unless you pay a steep penalty—an important fact that some dishonest salespeople conceal. Callable CDs may not be FDIC insured, so you should ask the salesperson for written verification.
Highly volatile investments: Investments like futures contracts and certain options contracts require constant monitoring to avoid potential losses. In fact, even if you do monitor them closely, you could still be vulnerable to large losses. If you're a new investor or can't constantly check on your accounts, these derivative investments may not be appropriate for you.
Deceptive sales people may track you down in a variety of ways:
Buying your information: Many scam artists will call you, email you, or mail you letters, all unsolicited, offering unrealistic promises of guaranteed returns or no-risk investments. Some con artists buy names and addresses of people who subscribe to specific magazines to target potential new victims.
Luring you in: Other scammers try to hook you in online investment chat rooms by raving about a hot stock that sparks your curiosity. Some place ads in newspapers often offering guaranteed returns on can't-miss investments. Even mainstream publications may carry these ads.
Approaching in person: You might meet a scam artist in person because some go where they think their targets may congregate. Never discuss your personal financial situation with a stranger, even if he or she seems helpful or suggests you have friends or loyalties in common. If someone you don’t know offers you an investment, turn it down.
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