Are big investments risky

Are Big Investments Risky?

The real risk in investing is ignorance

Karen and I have been friends for years. She called and told me about an investment she was considering. She was going to invest $50,000, which was pretty much all the money she had saved over the years.

“My two friends in California called me a few days ago, and they are all excited about this new investment they just got into. They told me that I am guaranteed to get 100 percent of my money back within the first six months. They said their friends are in it and a few celebrities too, and I need to decide quickly because it is only available until the end of the week.”

Nothing is guaranteed

The word “guaranteed” was a red flag for me, as was “get 100 percent of my money back within the first six months.” It definitely sounded like a deal that was too good to be true.

I asked Karen, “What specifically are these people investing in, and how can they guarantee you a 100-percent return in six months?”

She told me she didn’t know but would find out. I pleaded with her not to go forward until she had the answers to those questions. I also didn’t like the pressure to make such a big decision so quickly.

At the end of the week, Karen called me and said she was not going through with that investment. I felt relieved and suggested some other possible investments for her to research.

An uneducated decision

Five months later, I got an email from Karen that said: “I didn’t tell you. After I told my friends I was not going to invest, they came back a week later and said, ‘You are so lucky. You have another chance. They have extended the deadline for one more week. You can still get into this deal. We really think you should do it.’ The peer pressure got to me, so I invested my $50,000. Today, five months later, my money is gone. It was all a scam. I lost it all.”

I was overseas at the time. Had I been home, I’d have run over to her house, grabbed her, disconnected the phone, locked her in her bedroom, and not let her out until I was convinced that an ounce or more of common sense had flowed into her. I was astonished and even angry with her. She knew better. She let her emotions and personal friendships take over. She also didn’t do what she knew she had to do to check out this investment. She so wanted it to be true that she put her good judgment aside and rolled the dice.

The moral of that story is: With little or no financial know-how, a deal that sounds too good to be true… is. The lower your financial education, the higher your risk.

Are you educated or uneducated?

Have you ever been asked by a financial planner or stock broker, “What level of risk are you comfortable with? Are you conservative or aggressive when it comes to your investments?”

That is the wrong question to ask. The financial planner should instead be asking, “Are you educated or uneducated when it comes to your investments?”

You see, the conventional wisdom of most financial planners is, “The higher the return, the higher the risk.” This is simply not true.

What is true is, “The lower your financial intelligence, the higher the risk,” and, “The higher your financial intelligence, the lower the risk.”

Higher returns do not mean higher risk

The mistake so many people make is that they think the investment is risky. It’s not the investment that’s risky. It’s the investor. Think about it. An investment is just an investment—whether it’s a business, a property, a stock share, or a commodity. It’s you, the investor, who determine if a specific investment is a good investment or bad investment for you.

Not every investment you choose will be a good investment. No investor has a 100-percent track record of picking winners. Yet the more knowledge and experience you have, the better odds you have.

Original publish date: January 16, 2014

Join Our Community—1.5 Million Strong

Register for free!