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Red danger flag. (Photos.com)
Red danger flag. (Photos.com)

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Three red flags that signal an investment is not what it seems Add to ...

I recently got a tweet from someone I’d never heard of telling me about his “great success” with an investment. The next day, another tweet came, claiming he’s “loving all this new money!” I should click the link immediately, he urged.

Was that random stranger really a benevolent investor who wanted me to get rich quick? Probably not.

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Bob Stammers, director of Investor Education at the CFA Institute, says when someone contacts you online promising investment returns that seem too good to be true, beware. It’s the first red flag that an investment is not what it seems.

Another obvious warning sign is the urgency of the appeal, Mr. Stammers said in an interview. People who use high-pressure tactics to push you into an investment do not have your best interests in mind.

A third red flag is what Mr. Stammers calls the “illusion of consensus,” a common tactic used in Ponzi schemes, where insiders write reviews about how they’ve benefited from an investment to convince outsiders to join.

That’s not to say all financial advice found online is bad, Mr. Stammers adds. There are reputable agencies that use social media to distribute their research, just as there are bloggers, even anonymous ones, with solid opinions to share.

Some key questions to ask, however, are whether the information comes from someone with the credentials to offer investing advice, whether they have a motive or agenda for promoting certain investments, and whether their investment style fits your financial needs, Mr. Stammers says.

“The skill is parsing out what’s valuable and what’s noise,” he says, adding that even reputable mutual fund companies and big banks need to be questioned. “You need to be wary, you need to have some common sense and you need to understand the agenda and the background of the people who are giving you the information.”

So how do you protect yourself? The key is to be educated about investing, question what you read, do your own fact-checking, and find out as much as you can about where the advice is coming from. When in doubt, he adds, get a second opinion from a reputable financial adviser you trust.

“If you get a financial education, if you question what you read, and you get a second opinion, you can parse out what’s valuable information and what’s there to try to steer you toward buying.”

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