How to sniff out a bad investment

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BAD investments, like questionable body odour, stink.

However, sometimes the dollars signs in our eyes blind them to the stench of a dodgy investment in our nostrils because of one simple reason: we all love to make money.

Apart from pleading for a pay rise or working yourself silly with multiple jobs, the only way to make money is by investing.

There are thousands of opportunities, so how do you spot the stinkers? Here are five handy rules to remember.

1. TOO GOOD TO BE TRUE

If a promised investment return seems too good to be true, it almost certainly is.

The only truly safe investment is cash sitting in a savings account at a bank or credit union, because its guaranteed by the Federal Government. A problem today is that cash is paying peanuts so people are looking for other options.

Anything thats not cash in the bank carries a risk that you will lose some or all of your money. The general rule is the higher the return, the more risky the investment.

2. PUSHY SALES TACTICS

If someone phones you with a fantastic investment opportunity, hang up. The best investments dont need to be marketed to strangers.

Beware of spruikers telling you how you can make a fortune by borrowing money in your super to buy an investment property. Beware of anyone urging you to buy into a speculative stock or project, and always ask yourself whats in it for them?

Get rich quick seminars and computer software make more money for the promoters than the people who fork out hundreds of bucks for so-called proven ideas or technology.

3. HIGH FEES

Read the fine print on any investment opportunities and ask the adviser how they get paid. Before the Global Financial Crisis some salespeople enjoyed massive kickbacks for recommending products that were not suitable for clients but gave the adviser big financial bonuses.

Sometimes its the fees themselves that make an investment bad. If youre paying more than 1.5 cent in your superannuation, shop around. People charging thousands of dollars for investment advice may be trying to fleece you. Never accept a proposal without comparing its cost with the competition and a friend if possible.

4. THE BIG PICTURE

Youll have to do some homework, or pay a trusted investment adviser to do it for you, to work out the broader factors that may turn an investment bad.

Is the property in an area where rising unemployment may hit house prices? Is the companys share price under pressure from foreign competitors invading their turf? How does the Aussie dollar affect things?

Outside influences can play a massive role in determining investment success.

5. THE INVISIBLE INVESTMENT

The worst investment can often be the one you dont make.

Being paralysed by fear of losing money, and doing nothing, is no way to get ahead financially. The best way to overcome that fear is to take small steps and invest gradually over long periods of time.

Be prepared to have a crack, but spread your money across a wide range of investments to make sure that when one inevitably goes bad, you wont lose the lot.