Every investor aspires to maximize the value of their pot of money by the time they need to draw upon it for retirement, property purchase or indeed any other purpose.
Most of the mental energy expended by a retail investor will be committed to big decisions such as:
- Which stockbroker or wealth manager should I choose?
- What individual companies or products should I invest in?
- When should I buy and when should I sell?
The merits of these simple decisions will drive much of the variance in returns between individual investors, however, these factors alone will not guarantee financial success.
That’s because an unfortunate number of individual investors find their investments cut down or outright stolen. We’re talking about the 4 million people who fall victim to fraud each year.
Being the victim of fraud can bring many strong and negative emotions. An initial phase of denial can give way to a sense of profound loss. Soon arrives the rage and anger at the person or group who performed the act. For many, the final and lasting feeling is a lingering sense of embarrassment and shame.
However, if you take the following precautions you will dramatically reduce the risks of your money being ensnared by greedy criminals looking to take some of your hard-earned cash.
Perform due diligence before investing with a firm
When choosing a stockbroker or wealth management firm, you may become concerned by the number of choices available.
Even if you restrict your choices to firms that appear as authorized firms on the Financial Conduct Authority register, you’ll find that there are literally hundreds of companies you could choose.
A simple piece of advice is to stick with large institutions that have operated for many decades or even centuries.
Such firms have not only built up a reputation for treating their clients fairly but should also have the financial clout to withstand shocks and reimburse clients who have lost money due to fraud.
By sticking to large and reputable organizations, you are reducing the risk of finding yourself on the books of a sham firm which only served to collect cash from unwitting individuals.
Stick to large-cap stocks
Once you’re signed up with a stockbroker or wealth manager, you will be restricted to a range of hand-picked shares and funds that the stockbroker or wealth manager has approved. The shares available for purchase are usually the largest companies traded on each stock exchange, rather than the full list of securities.
This acts as an invisible filter that screens out many extremely high-risk opportunities that a trader could physically buy.
Just because an investment is available to buy through a stockbroker doesn’t mean that it will be a good investment or that it will produce a positive return over your investment period. But what it does confer is that the investment is a real opportunity or a real business.
Avoid ‘penny stocks’ and other fledgling listed companies
Remaining within the relative safety of a reputable stockbroker will prevent you from investing in what are known as penny stocks.
These are listed companies that are either close to bankruptcy or have already entered bankruptcy. The value of these companies is close to zero, and as a result, their shares may only be worth a penny each (hence the name).
A scam that gained attention after the book and film Wolf of Wall Street was released, was where unscrupulous brokers would telephone members of the public and encourage them to invest in penny stocks.
This was known as a pump and dump scam, because the perpetrators would buy a stake in the target company in advance of the campaign, and sell those shares when the public interest had pushed up the price by a significant percentage. The act of quickly cashing out their position would cause the share price to tumble; meaning most of the unwitting investors would lose a significant portion of their investment in a matter of weeks.
Protect yourself against identity theft or password theft
Of course, not all fraud occurs with the willing participation of the investor. In the age of remote banking and digital investing, bad actors could potentially access your account using stolen login names and passwords. However, there’s a little-known line of defence which you may not realise could improve the safety of your money.
Because of the way that financial service systems will allow you to reset your password by clicking a link from an email, your email account becomes the second line of defense when a third party is trying to change your password and lock you out of your accounts.
Therefore it follows that your email account needs to be the most secure account you own. It’s the backstop that could stop a thief from emptying your savings accounts even with possession of all of your banking details.
Therefore, please ensure that your email password meets high standards, and includes at least one of the following:
- A capital letter
- A symbol
- A number
Each of these characteristics will increase the difficulty of guessing your password by an order of magnitude.
Your hopes and dreams may rest upon the stability of your future finances, therefore you should not neglect these fraud-protection top tips when saving and investing online.