Beware of Risky Investments Promising High Returns
February 01, 2012
Following the Federal Reserve’s announcement that interest rates are expected to remain low until at least late 2014, the North American Securities Administrators Association (NASAA) is cautioning investors to beware of risky or outright fraudulent investments promising higher yield or returns.
"Investors running away from low yields on fixed investment products risk stumbling into the arms of unscrupulous salespeople promising low risk and high returns,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities. “Don’t chase the offer of high yield or returns into a dead-end investment."
Herstein said that state securities regulators are concerned that individuals who depend on fixed income investments, particularly seniors, may be tempted to turn away from their slower growing but safe investments to alternative investments without understanding the risks and terms.
All investments carry a degree of risk. The level of risk usually is related to the return that investors can expect to receive. Investments with higher yields or returns carry a higher risk to investors; the lower the risk, the lower the yield or return.
"When evaluating any investment, it pays to remember that risk and reward go together," Herstein said. "Anyone promising high yield or high returns with little or no risk should be approached with a high degree of skepticism."
Herstein noted that yield-starved investors may be more easily enticed into fraudulent schemes that can be cloaked as private placement offerings, promissory notes, securitized life settlement contracts and investments in energy, precious metals and distressed real estate, all of which are contained in NASAA’s current list of Top Investor Traps.
Questions to ask before purchasing any investment
Before purchasing any investment, NASAA reminds investors to ask the following questions:
Are claims made for the investment realistic?
Use common sense and get a professional, third-party opinion when presented with investment opportunities that seem to offer unusually high returns in comparison to other investment options.
Has the seller given you written information that fully explains the investment?
Request written information that fully explains the investment, such as a prospectus or offering circular. The documentation should contain enough clear and accurate information to allow you or your investment adviser to evaluate and verify the particulars of the investment.
Are the seller and investment licensed and registered in your state?
Call your state or provincial securities regulator to find out. If they are not, they may be operating illegally. In Washington, call DFI at 1.877.RING DFI (746-4334).