Learning what not to do is as important as knowing what to do when striving to become an experienced investor. While investors spend most of their time searching for good investments, they often ignore the warning signals that suggest red flags in a bad investment. Here are 10 costly mistakes made by so many investors and how to avoid them.
The first mistake investors often make is moving too fast and rushing into decisions. If someone pressures you with a time limit, it’s a red flag. As an experienced investor who’s dealt with thousands of real estate deals, I can tell you there’s always another good investment. Rushing prevents you from doing the proper due diligence and often leads to mistakes.
Similar to the first point, if an investment opportunity comes with pressure tactics, like “limited spots available” or “you must act now,” walk away. Trust your gut instinct. If you feel pressured or uncomfortable, it’s usually a sign to step back. No good investment requires you to make a rushed decision. Take your time, and do your due diligence before making a decision.
Many people make the mistake of relying on friends or family as their primary source of investment advice. While they may help introduce you to opportunities, they should not replace professional due diligence. Friends might have good intentions. However, they are often not experts in that field and may lack the knowledge or experience to guide you effectively.
It’s crucial to invest in things you understand. Complex investments—like those in AI or other emerging technologies—can be enticing, but you’re taking a big risk without sufficient knowledge. Look for clear financial investments, like companies with government contracts or revenue. Always do your due diligence before investing. If, after doing your due diligence, it’s still too complicated or you don't understand precisely what you are getting into, walk away.
Transparency is key when investing. If a company doesn’t have audited financials, third-party evaluations, or transparent reporting, it’s time to reconsider. Lack of transparency often leads to trouble down the road.
If an investment lacks tangible assets or is built on mysterious income sources, proceed cautiously. Tangible assets like real estate or commodities provide security, while vague income structures leave you vulnerable to losses.
One of the most common mistakes investors make is chasing short-term gains. Short-term gains can be tempting, especially when markets are on the rise. But markets fluctuate, and if you invest for quick profits, you could sell at a loss when the market corrects. The problem with short-term investing is that markets are unpredictable in the short term. Always invest with the long term in mind.
When people come into money—whether from an inheritance, lottery, or savings—they often rush to invest. But taking your time is key. Don’t let excitement push you into quick, greed-based decisions. A rushed investment is rarely a good one. Psychologically, money can feel like it’s “burning a hole in your pocket,” making you believe that you must act now or miss out on an opportunity. But smart investing requires patience. Just because you can invest doesn’t mean you should right away. The best investors are those who understand that it’s not about acting fast but acting wisely.
Greed is a silent killer in investing. If you’re making a solid return, don’t be tempted to chase after higher, riskier returns. Be content with making the safe investment over and over. As I have said in the past, have your risk buckets. I tend to keep about 10% of my investment budget for high-risk high-return investment opportunities. It’s essential to maintain a disciplined approach and not get swept away by promises of extraordinary returns, especially if you’re already seeing solid, consistent growth.
Lastly, many investors fail to consider external factors like inflation, interest rates, or changing costs. In 2022, many discussed future returns based on unrealistic sustainable growth without considering potential economic shifts. Always account for variables beyond just the growth of money, or you could end up with less than you bargained for.
Investing is about balance. If you spot one of these red flags, it’s time for more due diligence. Two red flags? Dive even deeper. But three? That’s your cue to run. Successful investing isn’t just about finding great opportunities. It’s about avoiding the traps that can ruin your financial future.
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Dutch Mendenhall represents RADD Companies, yet his expressed views are based on various businesses and their objectives and may not be aligned with each company's perspectives. These are not promised outcomes and do not indicate future results. The content provided is for informational purposes only and should not be considered professional advice. For more information, visit https://dutchmendenhall.com/disclosures/.
This work includes content generated with the assistance of artificial intelligence (AI).