Down here in Phoenix, we truly know what it means to be hot. The common qualification that it’s a “dry heat” doesn’t mean much at 110 degrees plus – dry or not, it’s miserable.
So-called “hot” investments can land you in misery as well. Too often in our business, we see clients that are hurt by betting on the neighbor’s stock tip or the latest investment fad. Let’s look at a few of the investment red flags today that should tell you to look elsewhere.
The first is just a general “too good to be true” situation. Perhaps you know someone who is starting a company and they’re raising some money through “angel investors” – investors that seed the genesis of the company before they begin selling stock.
They’ve given you the opportunity to be one of the chosen ones, to invest and then sit back and become rich through the miracle of their stock multiplying 50 times. Too often in these cases, their idea isn’t as popular as they were sure it would be. The expenses exceed their sales, and they fold, along with your investment.
Initial Public Offerings
Another investment red flag is an Initial Public Offering (IPO), where a company first starts selling their company stock to the public. Right out of the gate, on the day of the IPO, the stock price is usually very volatile. The price can skyrocket then plunge, making it more like gambling than investing. Even Warren Buffet says that in 54 years, Berkshire Hathaway has never invested in an IPO – just too risky.
I’m not saying to never consider them. Sometimes the IPO really goes the right direction, or the new company takes off and really does well. Just don’t invest more than you can comfortably lose. Never gamble a large percentage of your assets in these types of investments.
Unfortunately, some of the elderly clients we serve have become the targets of all kinds of shady dealings. Sometimes they are approached by legitimate investments, but the salesperson may not really care if the investment is good for the client.
At the top of the list of investment red flags for the elderly is the seller of index annuities. Most index annuities have early-out penalties that last for 10+ years and have very high commissions. The salesperson will tell you that the investment tracks an index, like the S&P 500, so you can make good returns, but can’t lose money in a down market.
Sounds too good to be true, and it is. The returns are usually capped, meaning that you can’t make more than the cap for the year. So, if the cap is 4%, even if the S&P 500’s returns vastly exceed 4%, that’s all you’re going to earn. Make sure you check the penalty period as well, something that is too often skipped in the presentation. Also, ask what the commission is, just for fun. It’s probably in excess of 8%, and I’ve seen them at 15%, on annuities that have 20-year penalty periods.
Hot – Don’t Touch!
The bottom line is this – be aware of all the pros and cons of any investment choice. Find someone you trust and who is a fiduciary, and stick with them, or at least present ideas to them for a second opinion before investing. Remember if the investment sounds too hot, don’t touch it – you might get burned!
At the Meikle Financial Group, we’ve bandaged up a lot of bad financial burns. We’re here to help with the well-researched, time-tested financial planning that puts you at the center.