9 Common but Terrible reasons to choose an investment

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There are some really good reasons to choose an investment.  When we hear things like, “it’s low cost, liquid, diversified, fits with my risk profile and is complementary to my other portfolio holdings”, we shout bravo!   Unfortunately we hear lots of other reasons that aren’t so good – here’s a selection:

  1. “The people involved in it are really smart people” – A classic!  It’s true, in our experience there are a lot of smart people involved in the investment world –  investment companies don’t usually hire dumb people to try to convince others to part with their money.  It’s a shame so many of them put their smarts to work crafting alluring sales strategies rather than helping people to do what’s sensible and in their best interest.
  2. “The principals have skin in the game” – Again, a classic sales tactic which tries to generate some warm fuzzy feeling because your incentives will be seemingly aligned with those involved.  Judge an investment by its own merits, not the motivations of those selling it.
  3. “I know the people involved”  – Another classic tactic to try to get you to hand over your money relying on the false comfort that if someone you know is involved you’re less likely to be taken for a ride.  A related nonsensical reason is if an investment is touted based on the fact that someone famous is involved.
  4. The returns are “virtually guaranteed” or “virtually risk free” – there is no such thing as a guaranteed return or totally risk free investment – if there were it wouldn’t return very much – people who use those terms are deceiving you at best and likely violating securities law.
  5. “I know the market and this is a winner” – Don’t fall victim to the cognitive biases that creep in if it’s an area you think you know something about.
  6. “It’s extra money I have that I don’t mind if I lose” – Please, please if you find yourself saying this, take a long look in the mirror and try to figure out if you really mean that.  I’m sure you can think of someone more deserving of your charity than the person selling you the investment.
  7. “The opportunity is right now and may not be there tomorrow”  When you get caught up in the moment in front of a very persuasive sales person, a sense of urgency to act can lead you to ignore or miss logical steps in your decision making process, steps that might otherwise uncover important risks or flaws.
  8. “Performance has been stellar” – Pretty much every investment opportunity you encounter will have the standard disclaimer “Past performance is no guarantee of future results.”  It’s the one common thing all selling documents contain (because they have to by law) that is absolutely true.  Don’t just read it as the bit of fine print that has to be there – it actually speaks volumes of truth.  Past performance means nothing yet usually it is the investments that have an impressive track record that will be put in front of you. Funny how these don’t often work going forward the way they have in the past.  While in our many years of experience we have seen a lot of poor investment performance, it’s no surprise we have never seen a pitch for an investment opportunity that showed poor past performance.
  9. “It’s stock in the company I work for – I know what’s going on” – Employee stock purchase plans that have a matching program or attractive discount can be a good way to enhance savings and investment returns but beware of your investment portfolio becoming overly concentrated in stock of the company you work for.  After all, your personal capital is already leveraged to your employer.  Take advantage of the match but check your corporate loyalty after that.

Again, most of these selling points have been crafted by really smart sales people who know how to appeal to psychological hot buttons and cognitive biases.   Before committing to any investment, take a step back and think carefully why you’re considering making an investment, especially if doing so would compromise the sensible investment criteria of low fee, liquid, diversified, risk appropriate, and complementary to your other investments.  You can always ask for an independent opinion.