Because You Asked: What Are the Risks Associated with Investing?

We are back in a brand new year (2020) and ready to address more questions.  This year’s first post was prompted by a recent communication from the Texas State Securities Board.

For both existing and potential new clients, this idea of “Risk” is an important part of our conversations about investing.  I recall a conversation with an individual who wanted an 8% annual return, but with NO risk.  My response was, “I’m sorry, but I can’t help you; that does not exist.”  I think that would fall under the category of “If it sounds too good to be true…”.  But it IS critical for investors to understand RISK and investing.  We utilize a program called Riskalyze to help individuals clarify the amount of risk they can accept that then defines the parameters of the returns they can expect with those risks.  We think of risk as the “Premium” investors pay for their investment returns.

While risk and investing go hand-in-hand, there are other types of risk that investors may not realize could carry a real threat to their financial health.  I have pulled the list below from a communique distributed by the Texas State Securities Board, which governs all investment activities and enforces state laws against those who are in violation.  The bulletin is titled: Top Threats to Investors in 2020- and How to Avoid Them.  Here are a few that I selected for your review.

THREAT: TARGETING THE ELDERLY

Risks to investors: Older people sometimes accumulate substantial assets after a lifetime of working and saving. They may also be experiencing cognitive decline. That’s the main reason fraudsters target them.

Cold calls remain a staple of investment fraud. The longer a fraudster can get someone to stay on the line, the greater the chances he or she can steal their money. Older people who welcome a chance to engage with others may be especially susceptible to this type of scam.

The State of Texas passed a law in 2017 requiring financial firms to report suspected financial fraud involving vulnerable adults. According to the law, “vulnerable” is defined as a person who is 65 or older or who has a mental or developmental disability. Investigations into suspected elder fraud consistently comprise a significant part of the enforcement workload.

What to do: Get a reality check from a trusted family member. Money is often a touchy topic within families, but for an older person a family support network is ideal.

No matter our age, most of us could use a trustworthy and informed friend or family member to give advice on large financial transactions or a change in investment strategy. A financial professional could help, too, whether it’s a certified public accountant, attorney, certified financial planner, or registered investment adviser.

Sometimes older people delay reporting fraud out of embarrassment, thinking it is an admission that they can no longer handle their own affairs. So, it’s important to report suspected fraud as soon as possible. Consult the resources on the For Seniors section of the State Securities Board Investor Education site.

THREAT: TALKING HEADS

Risks to investors: it’s easy to believe that someone who dispenses financial advice on the radio, online, or in books, has special expertise that can put you on the safe and secure path to wealth. Not bloody likely.

The airtime for many investment radio shows is bought and paid for by the hosts, who may or may not have legitimate financial credentials. The content may not always be objective but slanted to benefit the host or guest speakers.

The Internet is even more of an ethics-free zone for posting financial content, and there are many alleged financial experts who tout their books. One such book sounded particularly appealing: Robbed With a Pen Again: A Guide to Protecting Your Assets. The author, who also hawked his investment wares on radio shows, was sentenced to 12 years in state prison for fraud in 2018.

What to do: listen to, and read, pundits with skepticism. Some base their advice on risky investments that aren’t suitable for most investors. Some don’t disclose conflicts of interest and the fees they get for making certain recommendations. A lot of pundit talk is just noise, and it’s best to tune out anything that distracts you from sound investing principles.

THREAT: REAL ESTATE

Risks to investors: depending on the structure of the real estate investment offering, risk factors may include:

  • the illiquidity of the investment (you cannot easily access the cash you invested if you should need it);
  • the impact of changes in interest rates on the profitability of the investment or the ability to sell or refinance property;
  • the potential effect of demographics, property valuation, and rental rates on the revenue generated.
  • Some promoters of fraudulent real estate investments also claim to have special expertise that guarantees investors unrealistically high returns on their investments.
  • Another type of investment, the non-traded Real Estate Investment Trust (REIT), invests in the same assets as publicly traded REITs but carries the following risks not found in REITs listed on the major stock exchanges:
    • they are highly illiquid, long-term investments that must be held for 7 to 10 years on average;
    • some have limited redemption programs, but they are not required and may be suspended at any time;
    • significant front-end fees and commissions may be charged, reducing the amount of money that is actually invested in real estate.

What to do: be wary of claims that a real estate investment carries minimal risk because it is backed by a “hard asset” such as a parcel of land or a home or commercial building. Because non-traded REITs often require investors to meet minimum net worth and/or income standards, check the prospectus to make sure you meet those standards.

THREAT:  INVESTING IN PRECIOUS METALS

Risks to investors: Investments in gold, silver, and other precious metals are often sold as a supposed hedge against stock market crashes or some other economic calamity.

The industry is notorious for its aggressive, highly targeted cold-calling tactics, which include the use of social media and data mining to target potential investors on the basis of their political beliefs and age.

What to do: Avoid cold calls, period. Investments of any kind should be purchased by you and not sold to you, especially not over the phone in a scripted hard sell.  Be absolutely certain of all costs and fees associated with precious metals investments.

THREAT: UNREGISTERED INDIVIDUALS

Risks to investors: If you buy an investment from someone who is not registered to sell securities in Texas, chances are high you’re putting your money into a fraud. Almost all criminal actions undertaken by the State Securities Board involve people unregistered with the Securities Commissioner.

What to do: Always check to confirm that a person you are considering investing with is actually registered to sell investments. You can do this by visiting the State Securities Board website at: www.ssb.texas.gov or call our main office at 1-512-305-8301. If an individual is registered, you can request a free regulatory background check on him or her.

THREAT: CRYPTOCURRENCY OFFERINGS

Risks to investors: Cryptocurrency offerings are extraordinarily volatile—meaning risky—and almost impossible for a layperson to understand.

Investments tied to cryptocurrency hit everyone’s radar in 2017 when the price of one bitcoin reached a record high of $19,891, an increase of 1,800% for the year. But less than two months later, the price had dropped to $6,846. Cryptocurrency prices continue to be in a constant cycle of boom and bust.

Promoters of these investments look to take advantage of people who are swayed by the idea of virtual currencies as a quick path to wealth. Even seniors and retirees, who traditionally prioritize security over speculation, are being persuaded to invest in initial coin offerings and cryptocurrency mining pools.

What to do: Do not invest in cryptocurrency offerings unless you can determine some basic facts about the company. Make sure you can identify the principals of the company and its physical location. If you don’t, you will be transferring funds to anonymous third parties at undisclosed locations. Also ask to see audited records or other financial information to back up any claims of high profits.

Most important, deal with registered parties. The state of Texas’ rigorous registration requirements apply equally to traditional securities and emerging securities, including investment products tied to cryptocurrencies.

Keep in mind that you will have little or no recourse if your money is stolen. For extra motivation, take a look at the astounding facts detailed in the growing list of cryptocurrency enforcement actions the State Securities Board has taken to protect investors.

If you want to read the bulletin in its entirety, you can go here: https://www.ssb.texas.gov/news-publications/top-threats-investors-2020-%E2%80%94-and-how-avoid-them

 

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn