Just one or two bad investments can become a plague to your personal finances and ruin your budget. From term deposits to stocks and much, much more, how do you know left from right? How will you choose a good investment, or be able to spot a bad investment?
Some investment vehicles are not for everyone. Unless you are quite the savvy investor, you should be aware of some investments that should come with a warning sign:
- Airlines: "At the end of the day, it’s a commodity,” says Anne Brennan of the Fiscal Times. Airlines are a high risk investment.
- Penny Stocks: These may also be very dangerous territory for the unwary.
- Hedge Funds: High risk and expensive, hedge fund investments may not work out as planned…
- New Internet IPOs
Other specific investment worries can be common sense to spot. Take an expensive property investment, for example - whether you plan to live in it, rent it out, or do something else with it, you could be in way over your head financially if the investment becomes more than you expected. By the time you go through the home insurance comparison and pay for property taxes and maintenance, for example, you’ll see the costs mount up. This can extend your credit beyond your safety zone.
How to Avoid Risky Investments
Some general common sense investment advice can save you from a potentially bad investment. For instance, consider the following tips:
- Avoid making investments that involve surrender charges
- Be wary of investments that are not liquid, and be aware of terms and conditions on early withdrawal of your investment
- Investments that pay upfront commissions may be "too good to be true"
Even for those that are new to investing, a little reading of reliable information will give you a fair idea of what investment types may or may not suit you. Before you dive into things, however, there are a few more tips you might like to think about:
- Do Your Research: Never get involved in investments that you don’t understand. Examine rates, terms, and other things you need to know to understand how it works and your rights/options.
- Diversify: Don’t put all your eggs in one basket, as the saying goes, unless it's a very low-risk basket.
- Work With Your Budget: You have to make sure the mathematics will come ou in your favour. Are you neglecting your emergency savings in order to invest, for example? Should you be paying off a debt or saving for a known expense instead of investing your money? At the end of the day, it's your call.
Making a Good Investment
What constitutes a good investment will be dependent on your needs. And while we can look at typically strong investments, there will always be a link between your needs and your investment options. Your financial requirements are incredibly important to consider when you look at investments.
Another item we can add to the list of things to consider is your risk tolerance. As many experts have pointed out, this can significantly affect the way you treat investment options. Those who prefer to avoid risk may wish to look at savings funds, term deposits, and other low-risk investments. Others might chopose to look at riskier but potentially more rewarding investments like mutual funds, stocks, and others.
There may not be an easy and obvious choice for you, so give the options some thought. Remember there's no such thing as a "perfect" investment. However, examine your circumstances, your budget, your risk tolerance, and the previous performance of the investments you're considering to see which directions look promising. Do some research and give yourself time to consider your top choices. Beware of the bad investments out there, and keep an eye out for things that seem to good to be true - they often are.
This article is provided by Brian Neese, who shares finance tips on everything from home insurance comparison to term deposit rates.