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 24 March 2022
 09:30
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DOES YOUR INVESTMENT SOUND TOO GOOD TO BE TRUE?
IT MAY BE. HERE’S HOW YOU CAN CHECK.
When the promises made by an investment advisor sound too good to be true, it’s right to exercise caution. Below we list FIVE things you can do…
INFORMATION
1. Obtain more impartial information about the investment.
Watch out for inconsistencies between what is said by your investment advisor and what is written in the documentation provided. Make sure you read all documents carefully and never invest in anything you do not understand or that seems too good to be true. There is publicly available information on the past accounts of all public companies, and you can also read Key Investor Information Documents (KIID). The purpose of these is to provide investors with better disclosure, easier-to-understand content, and to facilitate comparisons between products.
ALTERNATIVES
2. Consider what other investments are available.
Always ask your investment advisor about investment alternatives. For instance, there may be a particular product that offers better options with high returns for the same risk. Once you are given all the available options, compare and consider before you proceed with investing. If at any stage you feel unsure, pressured, or the fund does not satisfy the checks you have carried out, do not proceed with the investment. Check out the CySEC Investor Guide “Seven important questions to ask before investing.”
INVESTOR BEHAVIOUR
3. Consider whether your investment is based on rationality or emotion.
Do you follow the social media accounts of influential people who make investment recommendations and/or take advice from friends with no financial skills? Does this information motivate your investment decisions? Investments that are guided by emotional factors, whether during periods of excessive euphoria or stress and panic, can overpower rational thinking and lead to unfortunate situations. Taking a rational and realistic approach to investment is key to avoiding bad investment decisions. Read more on how investor behaviour affects investment decisions here.
DIVERSIFICATION
4. Think about diversifying your investments.
Diversification strives to smooth out risk. It is a common risk management strategy amongst investors that mixes a variety of products within a portfolio. A diversified portfolio contains different asset types and investments in an attempt at limiting exposure to a single asset type. The main idea of diversification is that positive performance of some investments neutralizes the negative performance of others.
INDEPENDENT or NON-INDEPENDENT SERVICES
5. Check the basis on which your investment advisor is offering their services.
Investment services should only be sought from licensed and regulated entities governed by the Markets in Financial Instruments Directive, known as MiFID II. However, also bear in mind that before providing any investment advice, an entity must inform the client whether this advice is provided on an independent or a non-independent basis. Make sure that you are informed whether your investment advisor is independent or non-independent before you receive investment advice and prior to purchasing recommended products and services. To ensure whether the firm is a CySEC regulated entity, check it out on the CySEC website before you decide to transact with it.
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