Why You Should Avoid Investment Fads

6/27/2012, 1:33 p.m.

When choosing to invest your money, you want to invest wisely. Unlike saving money, which occurs when you put money away to grow while protecting your initial principle, investing money involves a certain amount of risk to your initial principle in order to generate a return on investment.

Unfortunately, no investment is without risk. A basic rule on investing is "the higher the risk, the higher the potential return." The risk in investment can vary depending on the opportunity and how comfortable an investor is with the risk. And while risk can be a good thing, there are times when you should be wary of the options being presented to you.

In today's financial world, greed is a driving factor for making bad investment decisions. All too often, the idea of quick and easy money is a siren song for the average investor, especially when it seems that everyone around you is cashing in. Of course, investment fads can and have made people money. For example, the dot-com boom of the 1990s certainly made its share of millionaires. However, it's important to remember that more people lost money in the subsequent dot-com bust.

How can you tell if an investment opportunity is a fad? Consider the following traits:

Changing Rules - When the dot-com boom hit in the late 1990s, it was touted as "the new economy," and many people said that it would change economics. It did not and instead went bust, along with many investors' hopes and dreams. Whenever an investment is said to be changing the rules, it is most likely an exaggeration. This means that other aspects of the investment might be exaggerated, as well.

Biggest Thing - If everyone and their grandmother is talking about what a "sure thing" a particular investment opportunity is, do not take their word for it. Where to invest your money is a serious decision and there is no such thing as a "sure thing" in the investment world. Otherwise, everyone would be millionaires.

Experts Disagree - When in doubt, listen to established investment experts. If established experts in the field are not jumping on board with a new investment idea, there is probably a reason. They know the industry better than anyone else, and if they aren't behind an investment opportunity, it's probably not a valid one.

If you think that the investment opportunity that you have found may be a fad, be cautious. All too often, investors can be dazzled by the promises of easy investments with huge returns either instantaneously or within a very short time frame. Be wary of investment opportunities that promise a huge return with little risk over a short period of time. As the saying goes, "If it seems too good to be true, it probably is."

If you are still unsure on whether or not an investment opportunity is a fad, consult an expert on the issue, such as your financial advisor. Your financial advisor can help you make balanced, strategic decisions about your investment portfolio and help you to avoid the pitfalls of investment fads.

Questions? Email me at wesley@thewandwgroup.com and visit our website at http://www.thewandwgroup.com. New Money Talk is a weekly article focusing on retirement, personal finance, and estate planning.

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