Investing: Control Your Risks

Time To Read 3 MIN READ

The risks you are prepared to take will influence the kinds of investments you make and the return you should expect. These rules will keep you in a comfortable risk zone (and let you sleep at night).

1. Don't invest until you're ready.

Your investment portfolio should be built on a solid foundation of sure things: sufficient insurance coverage and several months of income tucked securely away in interest-bearing Certificates of Deposit (CDs) or a money market fund. Only when you have that cushion are you ready to start investing.

2. Invest aggressively for the long term and conservatively for the short term.

Stocks should be thought of as investments for achieving your long-term goals. For short-term goals—that is, money you'll need within two or three years—stick with money market mutual funds, CDs and other sure bets.

3. Don't invest very much money in anything that leaves you uneasy after you have investigated its strengths and weaknesses.

The bigger the promised reward, the bigger your risk. This doesn't mean you should never take big risks; just don't take big risks with big chunks of your money.

4. Don't buy anything you don't know how to sell.

Some so-called investments, such as collectibles and gemstones, are easy to buy but may take specialized assistance to sell, because there are no organized national resale markets as there are for stocks and bonds.

How to avoid investment scams

There's hardly a legitimate investment that isn't considered fair game by crooks. They sell low-priced stocks, precious metals, rare coins, commodity contracts, diamonds, real estate. You name it, and someone will find a way to make a scam out of it.

To guard against becoming a victim, approach any unfamiliar investment with the following rules firmly in mind:

  • Deal only with established businesses. Confine your dealings to well-established local or national firms whose reputations you trust. If there truly are fantastic deals to be had, you can bet these companies will be aware of them.
  • Don't buy what you don't understand. Penny or micro-cap stocks, oil and gas deals, commodity contracts, art prints, rare coins—these are all specialized areas in which the experts make money sometimes and the amateurs almost always lose. If you don't understand what you're dealing with, seek the advice of someone who does—an accountant, lawyer or tax adviser.

How to checkout the broker

Contact the appropriate organization to see if complaints have been filed against the investment firm with which you're dealing:

  • Stockbrokers and mutual funds: Financial Industry Regulatory Authority (FINRA). Ask for the Central Registration Depository report (CRD) on the broker, or check its searchable database online. For a more detailed report, call the securities regulation office of the state in which the broker operates.

(FINRA is the largest nongovernmental regulator for securities firms doing business in the U.S. It was created in 2007 through a consolidation of the National Association of Securities Dealers (NASD) and various functions of the New York Stock Exchange.)

  • Business opportunities: Federal Trade Commission (FTC). But be aware that the FTC will not tell you about complaints unless it has acted on them.
  • Land sales: Interstate Land Sales Registration, U.S. Department of Housing and Urban Development (HUD).
  • Commodities contracts: Commodity Futures Trading Commission or National Futures Association.
  • Anything that comes in the mail: Criminal Investigations Service Center or contact your local postal inspector. You can also report suspected fraud online.

If you get suspicious, get out fast.

  • Stop payment on your check.
  • Demand your money back.
  • Threaten to go to the authorities.

This sort of fuss works more often than you might think. A crook doesn't want some disgruntled victim making a lot of noise and attracting the attention of the authorities. So if you think you're being ripped off, holler.