7 Glaring Signs You’re About To Make a Bad Investment
Written by
Caitlyn Moorhead
Edited by
Gary Dudak
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In the world of index funds, asset allocation and diversified portfolios, there are no guarantees. Even solid investments can go south due to bad timing or forces beyond your control. Still, many poor investment decisions can be avoided — if you know what to watch for.
Here are seven red flags that suggest an investment you’re considering might be a costly mistake.
A Broker Tells You To Buy It
Just because a broker recommends an investment doesn’t make it a smart move. Many brokers work on commission and aren’t required to act in your best interest. Some investments pay higher commissions than others, which may influence what they recommend.
Tip: Always ask how your advisor is compensated. If they’re incentivized to sell you something, tread carefully.
You Have To Borrow To Afford It
If you can’t buy an investment outright and need to take on debt to get in, that’s a clear sign to pause. Borrowing (or using margin) amplifies risk and adds interest costs, making a loss even more painful.
Also beware of pressure to “act now” before you “miss out.” A worthwhile investment today should still be a worthwhile investment next week. Urgency is often the hallmark of a scam — or a speculative bubble.
You’re Buying It Because Buffett Did
Warren Buffett is a legendary investor, but copying his moves blindly can backfire. He has billions to buffer losses, access to deals you don’t, and a long-term horizon that may not match yours.
Lesson: Invest based on your own financial goals and risk tolerance, not someone else’s portfolio, no matter how successful they are.
The Stock Is Soaring, but the Company Isn’t
If a stock’s price is skyrocketing while the company’s earnings are flat or falling, it’s likely overpriced. Stock prices should reflect a company’s actual performance. When they don’t, you risk buying into hype rather than value.
Watch for: A high price-to-earnings (P/E) ratio without strong earnings growth. That’s often a recipe for a painful correction.
It Doesn’t Match Your Risk Tolerance
No matter how promising an investment seems, if the daily ups and downs keep you up at night, it’s not right for you. Everyone has a different appetite for risk. Owning a volatile asset you can’t emotionally handle increases the chance you’ll sell at the wrong time.
Bottom line: Peace of mind is part of a smart investment strategy.
Insiders Are Selling, Not Buying
While insider buying can signal confidence, large-scale insider selling can be a red flag. Company executives usually know the most about their business, and if they’re unloading shares in bulk, it’s worth asking why.
Caution: A steady stream of insider selling with no corresponding buying could mean trouble ahead.
It’s Too Complicated — or Unregistered
If you can’t explain the investment in plain English, don’t invest. Complexity often masks risk, not value. The same goes for unregistered investments, which aren’t subject to the same investor protections as publicly traded stocks or bonds.
The gist: These products are typically aimed at accredited investors who can afford to take losses. If you’re not one, steer clear.
Final Take To GO
Good investing is about aligning with your goals, understanding what you own and knowing when to walk away. When an investment flashes these warning signs, don’t ignore them.
John Csiszar contributed to the reporting for this article.
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