Monday, May 25th, 2020

Beware of Exotic Investments

 

In era or low interest rates and slow economic growth many investors are tempted to seek out different ways to make more money. These often include hedge funds, venture capital or real estate deals. Unfortunately too many young investors put too much money into these sorts of investments before having their financial basics covered. And then they end up spending more money on investing than they make in returns. U.S. News writes about the hidden costs of exotic investments.

Once you have crossed the hard-earned threshold to be classified as a “high income earner”, you will be a prime target for salesmen pushing the latest and greatest exotic investments. Many of these investments are inappropriate for a large portion of the population, especially for those who have not covered the basics of saving and investing for retirement. Some people are lured into an inappropriate investment because they assume that this is the way “wealthy” people do it. Here are some of the complicated investment products often sold to high net worth individuals, and what to watch out for in each case.

The basics of how to start investing are mentioned in an article on our sister site, Profitable Investing Tips, How Do You Start Investing in the Stock Market?

If you are interested in making your money work for you over the long term, how do you start investing in the stock market? The first step is to take a look at your finances and your expenses. In fact how to start investing in stocks is to get your financial house in order first and then start picking stocks.

Pay off Your Credit Cards: If you have credit card debt you are paying between 13% and 20% a year on what you own the credit card company. It is difficult for an investor to routinely make this kind of a return on stocks so your first move should be to pay off your credit card debt.

You Need a Place to Live: It will cost you less over the long term to own your home than to rent. And the interest on your mortgage is tax deductible.

A Rainy Day Fund: It is all too common get trapped in a job with no future because you have no cash reserve. And it is all too common to lose a job and not be able to find one for six months to a year. Regarding investments you do not want to have to pull money out of a stock investment just as the market retreated. So, before picking stocks it is wise to have six months-worth of living expenses in the bank.

Now It Is Time to Pick Stocks: As you start investing in the stock market think about you goals. Do you want to save for retirement? Are you putting money aside to pay for your child’s college education? Are you looking to make lots and lots of money and are you willing to take on the risk that goes with aggressive investing?

A reason you should beware of exotic investments like hedge and venture capital fund is that they are very highly leveraged. If you win you will win big but the changes of losing are also great. You should not put money that you cannot afford to lose into these investments. And the reason that someone is setting up exotic investments and looking for your money is that they expect to make a profit on the first dollar you invest and will make money with fees even if you are losing. Don’t give up control of your money until you are absolutely certain that the lead investors in your project have as much to lose as you do.

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