With interest paid on savings accounts and investments at incredibly low levels, it’s tempting to look for a high-return alternative. But before you move your money, there are a few simple questions you should ask yourself.
The Australian Securities and Investments Commission (ASIC) warns that many companies fail to disclose important information or make claims that are misleading. So, asking the following three questions of any investment company could help clarify the true value of their offers and give you peace of mind.
1. To whom are you giving your money?
Banks, building societies, credit unions, super funds and life insurance companies are the only institutions specially regulated to make sure that, under all reasonable circumstances, they can meet their financial promises. Otherwise, you’re taking an extra risk, such as when buying shares. And, if property is involved, your investments are not automatically ‘as safe as houses’. You alone have to judge the risk that the company to whom you lend may fail or default.
2. Is the interest rate unfeasibly high?
If your expected return seems high, it adds extra risk. Your proposed investment may be more risky than a typical fixed-interest investment. You may risk losing a significant amount of what you’re planning to invest, so it’s vital to check if you’ve got all the facts and whether you can handle those risks. These must be spelled out in the product disclosure statement or the prospectus, which the fund must give you.
3. Do you plan to put all your eggs in one basket?
Placing all your funds in one investment is extremely risky unless you’re putting the money into a deposit with a bank, building society, credit union, super fund or life insurance company. If things go wrong, your entire nest egg could be wiped out. Unless you can afford to lose all your money, spread your risk by spreading your investments.
You should never make any financial commitments without first discussing your needs and goals with an independent financial advisor.