To see whether an investment is likely to be credible or not, there are a few simple questions which we can ask ourselves.
Does the return corresponds with the risk being taken ?As a general rule of thumb, the risk should correspond with the returns. If the risk is low, then the return should be low. But then again, how low is low exactly ? For risk-free investments such as government bonds or fixed deposits, the return should be a low single digit. We should be looking at around 2% plus or minus approximately. For investments which are of low risk, the return should be in the single digit range although this will be higher than that of the risk-free investments. Any investments that promise to return over 10% to 20% or even more and claim to be risk-free is likely to be fraudulent. If the investment that you are considering passes this test, then perhaps you may consider to find out more about it. However, do also remember that for the recent Minibonds saga, they were marketed as low-risk investment products and the returns were low indeed. But I'm sure all of us know that truth by now that these Minibonds were a high-risk and low return investment. So that brings me to my next point.
Do you understand in the product that you are investing in ?
This can be summed up in the next sentence. If you do not understand the investment that you are investing in, then do not invest in it. Pretty simple and straightforward.
To know whether you understand the product that you are investing in, you can ask the following questions.
- Do you know how this investment works ?
- What is the maximum loss if this investment fails ?
- What will happen if this investment folds up ?
- Is this investment sustainable in the long run ?
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