Believe it or not! The crisis unleashed by the Covid-19 pandemic among other things exposed all of us to some important money lessons which serve as a guidance path to mitigate the risks of any financial catastrophe. In the last couple of years, we have been observing innovations in genuine financial products to serve in line with the never-seen-before emerging needs.
However, at the same time a chain of financial products has hit (and continues to hit) markets in one form or the other that promise magical returns in minimum time. We frequently come across investment and savings schemes promising high rates of interest contrary to the market environment.
But, investing in such schemes has always been a very risky proposition. And the chances are that it is a trap to rob investors of their hard-earned money. In simpler terms, the innovative financial products luring investors with quick and high returns contrary to the market environment are always loaded with high risk.
Such products may give hefty returns to the investor on a short term basis, but most of the schemes later vanish in thin air, swindling investors’ money and remain untraced.
Despite incidents of fraud committed through these schemes reported at regular intervals, investment in these high-risk products promising high returns continues to witness a rush of investors.
Actually, the architects of these products continue to revamp these ‘fraudulent’ schemes clandestinely and present the revamped features of the products in such a glittering way that most of the time it becomes difficult for gullible investors to avoid falling victim to the greed of making quick bucks.
Precisely, the ‘hefty’ returns on investment are magically highlighted to lure a common man to catch hold of the schemes by hook or crook. However, it’s also a fact that the greed to make easy money has now become so intense that most of the time it overpowers the financial wisdom of investors.
A huge chain of small investors has already fallen victim to this greed of making quick and easy money and have lost thousands of crores in ‘fraudulent’ schemes. Mostly, these schemes are designed in such a way that investors are paid from money collected from new investors instead of the scheme generating its own earnings. Such schemes run as long as new investors keep investing in the scheme.
However, it’s not only a matter of ‘dubious’ financial schemes, even a lot of small investors lack guidance and market-oriented knowledge to explore appropriate investment opportunities. They are even clueless about the deposit as well as loan schemes to bank upon for their economic prosperity.
What should gullible (retail) investors do to save themselves from the risk of losing their money?
Basically, it is all about money management. As far as managing money is concerned, you can certainly go for it all alone. Doing it yourself is, of course, a brilliant idea, but mastering money management skills vis-à-vis investment matters, especially the stock market, requires intensive research and learning.
Day by day as you get busier, your financial goals get more complicated. It’s here that the financial consultants (advisors) role emerges and he can help you to remain disciplined about your financial strategies. However, asking him questions and following his advice will surely not only lead to growth in your investment but also help to minimize your risk in the event of any stormy situation.
What exactly is the role of a financial advisor/consultant?
Today the market is flooded with varied financial instruments and it is impossible for an individual to understand everything that is available for them. In this crowd of financial instruments, individuals cannot pick what is best for them and it’s only a good financial advisor who can help an investor to put the right investments in place.
So, in the given circumstances, it makes sense to route your investment in the market through professional financial advisors. You have to think about the importance of a financial advisor as you think about a doctor who prescribes medicines for treatment of your illness. Precisely, a financial advisor is like a medical doctor for an investor.
For instance, an investor should not go into the stock market without a stock market consultant. This way the investor can lay hands on investment options that would generate profits in a secured way. One may think about himself as a knowledgeable investor for having access to financial information on the internet, but the fact is that advice from a financial advisor in investment matters definitely makes a difference.
Since financial markets are unpredictable, we cannot say financial advisors will give foolproof advice. However, his advice based on the investor’s particular situation and goals can help to minimize the financial risks. To get maximum out of the financial advisor, you have to at least let him know about your level of conservativeness and appetite for risk.
You should not forget to make the financial advisor understand you better so that his financial plan for you includes a diversified portfolio of various instruments to meet your financial goals. It’s the financial advisor who helps you to strike a balance by making him aware of various investment options in line with your financial strength.
However, engaging a financial advisor doesn’t exonerate you as an investor to remain aloof from your investment portfolio. Once you are on board with a financial advisor and your portfolio is put together, you need to monitor that portfolio. You should have a regular performance review of your investment portfolio with your financial advisor. Don’t forget to update your advisor about any life situation change which you may undergo at any point of time.
One more important thing, don’t take an agent as a financial advisor. There is a breed of self-styled ‘financial advisors’, who are actually agents. Here you need to understand the difference between a financial advisor and an agent. A financial advisor has a fiduciary responsibility which means his advice must be suitable to you. For instance, if a 75-year-old person goes to buy a high-risk fund, the advisor will say no. He will not recommend a high-risk investment product to an old person. On the other hand, the agent will offer the product as soon as the old person demands it. The agent simply vends products and his income is dependent more on sales. The advisor will charge you a fee for his services.
There is a growing breed of market analysts who leave no stone unturned to dish out their opinion on stock market movements. How trust worthy are these market analysts?
Of course, analysts in today’s markets are key to important sources of information. But investors should understand the potential conflicts of interest they might face. Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly.
So what matters is the investor’s own application of mind while being in the markets. You as an investor should not exclusively rely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, you should also do your own research about the company whose stocks you are going to purchase or sell. Don’t overstep your financial landscape while making a decision to invest in the financial market.
However, it is also to be understood that an analyst may have a conflict of interest, but it does not mean that his recommendation is always faulty. It’s up to you as an investor to assess whether the recommendation is wise for you or not. You should educate yourself to make sure that any investment you choose matches your goals and risk bearing capacity.
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.