I live in an area that is rather homogeneous. Many people in my town belong to the same religion. Many of my neighbors are in my church congregation. When you have someone who shares something in common with you, it can seem easy to trust. And, while this is very common in cases where you share a religion (hey, we all have the same notions of good and God, don’t we?), trust is also strong — perhaps without real cause — between members of the same ethnic groups and races. Sometimes, you feel inclined to trust others because you are on the the parent board together at your child’s school, or because you are co-workers. Our social interactions provide us with ample opportunities to find fellow feeling with others and come to trust them.
Unfortunately, it is just this trust that can lead to trouble when it comes to your investment decisions. Our congregational leader regularly receives and reads a letter from the higher-ups in our church, warning members to be wary of investment schemes perpetrated by others of our faith (or pretending to be). Members of various religious sects find themselves approached by congregants claiming to have some “inside” information about an investment, or offering a chance to “get in on the ground floor” of some great new fund. Or, you might be invited to take part in an “investment opportunity” by someone you know at work, or by the parents of your child’s best friend.
You think that the investment is full proof because you trust the person offering it because you know them. You put in quite a bit of money, and then, after what looks like a successful run, your money evaporates as the investment finally tanks. Or you find out that it was never really a legitimate investment to begin with. Perhaps it was just a scam. Your “hot tip” has turned into a huge financial mistake.
Not Everyone is Out to Scam You
Of course, your neighbors may not be out to scam you. While there are plenty of hucksters that will prey on the fact that you have something in common with them in order to gain your trust, many of your neighbors are likely victims like you are. They’ve been offered this “opportunity” (and maybe a bonus if they bring in their friends), and they genuinely believe that they are doing you a favor by getting you involved. However, even if these folks don’t mean to encourage you in a money-losing venture, the fact of the matter is that your money is just as lost as ever. Which is why it is important to be very wary of investments that your neighbors are enthusiastic about.
One of the signs that an investment is in bubble mode is that you hear a lot of people talking about it. Another sign is high, quick returns without any discernible fundamental reason. (These can also be signs that something is a scam.) Even though you might be tempted to follow the herd and join in, it is usually a good idea to do thorough research first. Also, it is wise to review your investment plan. If this new investment doesn’t fit with your goals, and doesn’t mesh well with your long-term investment plan, it might be a good idea to pass. You don’t have to put your friendship at risk when you turn down investment “opportunities.” Just say “no thank you.” A true friend won’t pressure you into taking a financial risk you aren’t comfortable with.
Do you trust your neighbors when they offer investment advice?