Business

The red flags of investing

With Lisa Minto-Powel

Sunday, April 23, 2017    

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There are so many red flags in our everyday lives that signal danger to us. The earliest citation for “red flags” in the Oxford English Dictionary is from 1602, and it shows that at that time the flag was used by military forces to indicate that they were preparing for battle.

The expression “to raise the red flag” comes from various usages of real flags throughout history. Red flags of various designs indicate dangerous wind and wave conditions for mariners. In auto racing, a red flag indicates a stop to the race due to dangerous conditions.

Nowadays we use red flags for different reasons and conditions in our daily lives. These can occur on our roads; for example, when we see a red flag raised by a road worker, we need to slow down and stop in order to prevent an accident.

It also affects our lives when we feel unwell physically and ignore the signs of illness (red flags) to our peril, ending up instead at the doctor’s office where we are told to make significant lifestyle changes, because if we don’t we may get gravely ill and die.


Well, today we are looking at the red flags of investing. A red flag regarding your investment can indicate potential problems with an investment in your portfolio. It could be the negative news report on a stock or bond, or the financial statements of the companies.

There are numerous indicators used by financial advisors when purchasing an investment; likewise, there are similar reasons to exit an investment. So let us look at a few of the red flags to watch for when we are investing.

Does it sound too good to be true when you are introduced to an investment that promises low risk and high returns? Such an investment might really be too good to be true.

High returns are almost always related to high risk, and this is an indication (red flag) that the investment must be thoroughly researched before you dive in.

Any business that promises substantial returns in a short time frame should make you wary. Always conduct detailed due diligence to assess the viability of a potential investment.

When you are being rushed to sign on the dotted line, that is a major red flag waving right before your eyes. Don’t let your financial advisor rush you into signing documents that have not been fully explained to you. If you feel uncomfortable and you believe that after asking the pertinent questions you are still unsure, keep going over the process until you understand. Never sign without fully reading the fine print, and make sure that you understand the pros and cons of the investment.

Investing your money is a serious decision, and you should be crystal clear regarding the details of the investment you are about to make. Investing should always be done with due consideration and time.

We should also beware of individuals and complete strangers who offer unsolicited investment advice and opportunities. When this happens,you should see the red flag in all its glory fluttering in front of you.

If you are approached by a friend or colleague who you know has limited investment knowledge, get more information before you proceed. Call your advisor to confirm that any investment worth your money must be registered, implying that your advisor would be aware of it or could help you decide whether to invest. A point to note is that scams may come in the form of unsolicited investment offers, so avoid offers like these at all costs.

Investment advisors must be professional. If an investment advisor is giving out “confidential advice”, this person may be actually deceiving you and his/her employer. Don’t put yourself at risk. It is not only illegal and unethical, it is often known as insider trading, which is punishable by law.

Oftentimes many advisors come across as pushy and forceful, If you sense they are not taking into account your risk profile, it may mean that they are not making their predefined monthly quota and that makes them pushy, which is not a good sign. If an advisor is pressuring you to invest, chances are there’s something amiss.

Companies that are in trouble will try and convince you to invest your money way before you figure out why. They promote instruments that are extremely risky and are nowhere close to your time horizon and risk tolerance. Often it’s a strategy to offload declining assets on their books. As an investor, it’s important to remember that you always have the upper hand and should never settle for anything less than the targeted yields.

Another point to note is that no company in the world can guarantee profits. Any business that takes that approach and is willing to guarantee returns is probably looking for any investor that seems interested. This is a huge risk you are taking, and most times it’s not safe to invest in such a company, so be careful. Avoidance will protect you from being caught up in a bad investment.

Be careful of investments that are advertised with most of the relevant information, but excluding the most important point — the yield on the instrument. It might look great, but it is important to know how much you will earn and at what cost. There are often advertisements which are misleading to the average investor.

Last but not least, a missing paper trail is a red flag that cannot be ignored. Before committing to an investment by signing a contract, you should ask for the financial statement or see a graph of how the investment has been trending since inception. This helps you to better see the progress of the company and the investment before you commit to it.

If there is no paper trail or documentation to peruse, it’s likely that the company may be recommending a risky investment. Ask for relevant paperwork, legitimate financials, and see how readily they comply.

If you see any red flags, proceed with extreme caution. Happy investing from Sterling!

Lisa Minto-Powell is the manager, Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm.

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