Investing is a really popular way to grow your wealth and achieve your financial goals. But is it a good idea to grab the easiest or quickest option? Definitely not. 

If you want your hard-earned money steadily creating wealth over time, it’s important to be aware of investment red flags.

Whether you are new to investing or more seasoned, and whether you invest in stocks or property, there are few common red flags and warning signs to keep a look out for.

Investment red flags and warning signs

1. Not being financially prepared

It’s important to be as financially ready to invest as you can be. And there are some red flags that will show you if you’re not.

• If you’re carrying a lot of outstanding debts, such as personal loans and credit cards. If you are, these should be paid off or substantially paid down before you consider investing.
• If you don’t have a savings buffer. This should be around three months’ worth of household expenses, so you have ready access to cash in an emergency and won’t be compelled to access cash by selling off shares or a property quickly.

2. You don’t have clear financial goals or a strong investment plan

Not having clear financial goals or a strong investment plan will put you at risk of failure. You’re more likely to achieve success if you set clear goals for yourself – both financial and through your investment strategy.

Be clear on why you’re investing, your investment timeframe and how you will measure your results. Then build your investment plan around how you will achieve those financial goals – both short- and long-term.

3. You haven’t done your homework

A huge investment red flag is entering into any investment without doing your homework. That means researching every opportunity, looking for the investment model that is best for your circumstances and taking the time to seek professional guidance if you need it.

You also need to work out how you’ll keep track of your investments and make time to review them regularly. Consider whether you’ll do this yourself or engage professional help.

Investing in shares – your homework

If you’re looking to invest in shares, research the company or investment fund. Look at its financial statements and how it’s performed over time. Does investing in the company’s shares align with your financial goals, investment plan and risk tolerance? If not, walk away.

Investing in property – your homework

Speaking specifically about property investment red flags, it’s important to do your homework and stick to your long term plan. Research comparable properties and prices in the area, as well as tenancy vacancy rates. Set your price limit and stick to it. Overpaying for a property can knock on into lower rental returns and negative cash flow.

4. Not being realistic about associated costs

If you don’t include an analysis of the costs associated with your investment, you could be putting yourself at risk. Make sure you do your due diligence and find out exactly what other costs may arise due to any specific investment.

For example, with property investments, these associated costs might include:

• Hidden home loan costs. These could include stamp duty, insurance, council rates, ongoing repairs and maintenance.
• Property manager’s fees. Remember though that a good property manager can be well worth it. They’ll take care of property inspections, scheduling tradespeople for repairs, handle the relationship with your tenant and stay abreast of legal requirements and the rental market.

5. Not diversifying

Long-term investing is definitely not the time to put all your financial eggs into one basket. And if you are, this could be a serious investment red flag. A non-diversified stock or property portfolio can leave you financially vulnerable, particularly if there is a downturn in one area of the market.

If you’re expanding your investment property portfolio, consider diversifying to different types of property, both residential and commercial, in different regions or even states. The Sydney unit market for example, can differ from residential properties in other cities.

It’s good to be aware too, of the types of properties that banks consider to be risky. By diversifying your investment property portfolio, the negative performance of one property in one location can be minimised and absorbed.

6. Playing for a quick return

Looking for a quick return is a serious investment red flag. If you’re looking for a quick return you might be setting yourself up for disaster.

We understand that it’s very tempting to focus on short-term financial gains – but these can be high-risk, particularly investments that seem too good to be true. Instead, it’s far more advisable to be prepared to play the long game.

Be patient and stick to your plan through market fluctuations or dips in the stock market. Investing tends to be a marathon, not a sprint. So be prepared to ride out minor ups and downs to achieve your long-term plan.

7. Not tracking your investments

Too often people invest in something and then just leave it to do its thing. If you want to be successful over the long term, you need to ensure that you’re tracking your investments. Review your investments regularly to see how they’re performing and that you’re getting the returns that you expect to see.

Getting started

If you’re considering getting started on the investment track, the federal government’s MoneySmart website has some excellent tips on planning, choosing, and tracking your investments. It’s a good idea to take a little time to read through their keys to successful investing. They’ll help you to plan, research and understand the different types of investments and which may be most suitable for you and your financial circumstances and goals.

And of course, no matter where you are on your investment journey, we can help you to get investment ready. Our team is ready with excellent advice, and we have property investment loans from over 40 lenders, if that’s the right choice for you.

Give our Lending Loop team a call today to get started.