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Cash Course: Red Flags To Look Out For And Avoid When Investing

by Niranjana Mittal

By: Atul Sethi

A Brief Summary:

•Heeding warning signs before making investment decisions can help you avoid ugly situations.

The more complex an investment product is, the more chances are that things could go wrong. Make sure you know how much can be lost before considering how high it can go.

If someone is selling you something, paying attention to how they sell will help you quickly learn a lot about them. If they cannot explain clearly what is being sold, run.

Develop your own criteria for decisions you need to make. Doing so may help to simplify this part of your

Lots of poor investment results have similarities. In some of these cases, pain can be avoided if the investor is a little discerning. If you have criteria that’ll help you look out for red flags, ugly surprises may be dodged. Here are examples of some red flags you can look out for:

More Complicated Means More Room for Error

The more complex an investment product is, the higher the chances of extreme results. If all goes well, you may make a lot of money. If things do not go well, you may be left with very little. Often, investors are not aware of this when putting their money at stake. If the price of your investment is linked to the price of something else, this is a sign of such a situation.

People want to know how much money they can make, but it’s also important you make sure you know how much you may lose. Sometimes these investment products are marketed as sophisticated. There are no style points in investing. Warren Buffett is not known for his sophistication and that is not a requirement for any successful investing.

What to be Wary of With Salespeople

An easy way to tell if you need to be worried is to examine the behaviour of the person trying to sell something to you. Being able to detect whether or not your interests are at the forefront of the mind of the person across the table form you, will help you.

These are some questions you can ask yourself:

1. Are they transparent about how they get paid?

2. Can they explain what they are selling you to a 5-year old? Can you explain it after they’ve explained it to you?

3. Are they trying to make guarantees? The future is uncertain and someone trying to tell you otherwise is trying to profit from it.

The opposite is true: when salespeople do not do these things, they may be able to help you.

Know What You Like and Kill the Rest

You can apply this concept a step further and make criteria for what you will not consider. The process of elimination can be even more useful than finding the needle in the haystack. Put in the work up front to figure out what is appropriate; you can then discard everything that does not meet your requirements. If you purchase Thai tax-savings mutual funds (RMF/SSF/Thai ESG), excluding funds that charge you high fees can help you. When you purchase these funds or look through a selection online, exclude funds with an expense ratio of 1.5 percent per annum, and apply filters to bring down your selection pool.

Atul Sethi is the founder and CEO of Farnam Tree, a licensed boutique investment firm based in Bangkok. Atul has over twelve years’ experience working in investment banking and as a research analyst, prior to starting Farnam Tree.

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