Lured by false promises of big yields and high returns, investors often make the mistake of putting their money into one investment basket – one that contains risky and obscure financial products that fail to live up to their hype.
On July 25, the Financial Industry Regulatory Authority (FINRA) issued an Investor Alert on this very subject. In the alert, FINRA offers insight on why more investors are “chasing returns,” meaning they are putting their assets into more and more riskier investments.
Many investors do not realize they could be taking on more risk if they invest in products with higher returns, FINRA says. Those investments include non-traded real estate investment trust (REITs), high-yield bonds, structured products and floating-rate loan funds.
Before investors consider moving their assets to another investment, FINRA suggests that they ask themselves the following questions:
- Does the higher return from the investment come with increased risk? In most cases, the answer is “yes,” FINRA says.
- Do you thoroughly understand how the investment operates? A number of investments come with an unwanted surprise, such illiquidity, exit fees, loss of principal or the return of the investment in a form other than cash.
- Are there costs and fees associated with the new investment? Not only is the promise of higher return associated with greater risk, but some of these investments have higher costs, as well.
- Is the product callable? A callable investment means that after a period of time, the issuer can redeem the investment prior to the investment reaching maturity.
- Could the new investment be fraudulent? Legitimate investments that promise returns of 30, 50 or even 100% annually without any risk to your principal exist only in fantasy land. To confirm the status of an individual broker or firm, use FINRA’s BrokerCheck. To check the status of an investment adviser or firm, use the Investment Adviser Public Disclosure database.
The bottom line: It’s important to read and understand the fine print about an investment before deciding to put your money into it. In almost every instance, a product that promises high yields and returns also comes with considerably more risk – and a greater potential for financial loss.
To learn more about various investments that investors are turning to as a way to “chase returns,” go to tiny.cc/z6kty.