Experts: Do your homework before investing

Many investors have watched their nest eggs grow and shrink dramatically in the last year, so it may be tempting for them to believe promises of safe investments with greater-than-market returns.

Just ask the hundreds of people J.V. Huffman Jr. is accused of scamming an estimated $25 million from during the last 17 years. The Claremont man faces four felony counts of securities fraud in connection with a mortgage buying and selling scheme in which investors were promised returns as high as 16.54 percent.

"If something seems too good to be true, it's usually best to run, not walk, away from it," said Thomas F. Bare II, a registered investment adviser and president and chief executive officer of Hickory-based Carolina Investment Advisors, a fee-based financial planning firm.

Bare and other investment professionals stress that when it comes to investments, one size does not fit all.

"Everyone's situation is different, everyone's risk tolerance is different," Bare said.

"That's why as a financial planner, I'd have to ask a lot of pertinent questions before I could even begin to act in a person's best interest. An awful lot has to be considered."

First, a potential investor needs to consider his or her overall financial situation.

For example, paying off high-interest credit card balances before making any kind of investment probably makes sense, professionals said.

Also, most experts agree that a family should have at least three months of living expenses on hand before tying up money in long-term investments.

Do you have adequate life insurance?

Do you participate in a company-sponsored 401(k)?

Do you have an IRA account?

Income level, job market forecasts, tax brackets and age are other key factors to consider, as are temperament. Some people just don't cope with financial risk as well as others.

Beyond that, investments carry various levels of risk.

"What's safe for one person may not be safe for another," said Katherine Newton, a certified financial planner with Hickory-based Waite Financial Group.

"And diversification is always important," Newton said.

Although today's investment environment is changing quickly, and what was considered conservative a year ago may be looked at as risky today, the following are some basic investment vehicles grouped by degree of risk.

Cash, Cash Equivalent

Cash, savings accounts, certificates of deposit, money market funds and U.S. Treasury securities (Treasury bills, Treasury notes, Treasury bonds and savings bonds) are low-risk investments that can easily be liquidated into cash.

They typically provide low return on investment, and little or no inflation protection.

For example, certificates of deposit are currently paying from 3.5 to 4 percent interest, money market funds up to 3 percent. The principal in certificates of deposit is federally insured.

Low-Risk Investments

This category generally includes zero coupon bonds, some high-quality corporate bonds and bond funds as well as other fixed-income investments. Historically, dividend-paying common stocks have also been considered low-risk investments. An annuity with a principal guarantee also limits risk.

Moderate-Risk Investments

For many people, a big portion of their retirement money falls into this category of investment vehicles. They generally provide the best balance between risk and reward for long-term investing.

Such investments include blue chip and high-quality stocks, stock mutual funds and exchange-traded funds and moderate yield bonds. People often include real estate in this investment category. Some variable annuities also are considered moderate-risk, depending on their underlying investments.

Speculative investments

Speculative investments, which carry a high degree of risk, include futures contracts, stock options, high yield bonds (junk bonds), precious metals and gems, penny stocks and high-risk mutual funds.

Also included are short selling, hedge funds, the foreign exchange market and antiques, stamps, coins and other collectibles. Some variable annuities also are considered speculative.

Seeking Help

Investment professionals offer a wide range of services at a variety of prices.

You can get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual funds and insurance companies. You can also hire a broker, an accountant, an investment adviser, a financial planner or other professional to help make investment decisions.

Some financial planners and investment advisers offer a complete financial plan, assessing every aspect of a client's financial life and developing a detailed strategy for meeting his or her financial goals.

They may charge a fee for the plan, a percentage of the assets they manage, receive commissions from the companies whose products their clients buy or a combination of those.

The U.S. Securities and Exchange Commission advises people to know exactly what services they are getting and how much they will cost.

People or firms that are paid a fee to give advice, either hourly or as a percentage of assets managed, generally must register with either the Securities and Exchange Commission or with the state securities agency where they have their principal place of business if they want to hold themselves out as a registered investment adviser.

Additionally, anyone who sells investment products must carry the appropriate Financial Industry Regulatory Authority license.

To find out about advisers and whether they are properly registered, you can read their registration forms online by visiting the Investment Adviser Public Disclosure Web site at www.adviserinfo.sec.gov or the N.C. State Securities Division site at www.sosnc.com.

Brokers make recommendations about specific investments like stocks, bonds or mutual funds. They do not generally give clients a detailed financial plan. Brokers are generally paid commissions when you buy or sell securities through them.

A discount brokerage charges lower fees than a full-service brokerage, but the client generally has to research and choose investments by himself.

The Securities and Exchange Commission said the best way to choose an investment professional is to start by asking friends and colleagues for recommendations. Then meet with potential advisers face to face. Be prepared to answer plenty of questions, and to ask questions yourself.

Bare said to beware of high-pressure tactics.

"If someone says you must act now, that should be a definite red flag," he said.

Investors also should be wary of their own potential for greed, Bare said.

"Don't let greed cloud your common sense," he said.

"You have to be prudent and you have to do your homework.

"And you must never forget that if it sounds too good to be true, it probably is."