If it was possible to accurately pick which investments would succeed and which were doomed, then you’d become very wealthy very quickly.
But it’s tough to do — in hindsight it may seem obvious when there was that optimal time to bail out of an investment. Often very clever people just stick with it despite warning signs, optimistically hoping things improve, or believing rosy stories from managers.
Nokia, Kodak, and other big companies that once dominated their fields effectively disappeared within just a few years. Picking which company is solid, and which is precarious isn’t an exact science and there may be things happening behind the scenes that you won’t know about until it’s too late.
However, we’ve collected a few warnings signs you can keep an eye out for. It’s not an exhaustive list and none of them individually means definite bad times lie ahead, but these red flags should make you carefully consider whether it’s time to get out of an investment. Some might also tip you off about potential problems with your investment platform or adviser.
Payment defaults
Your investment provider (including any company you might have purchased bonds or securities in) may delay or stop making payments due to you. Contact them immediately to find out what is happening.
Consistent underperformance
While occasional under-performance is normal, if your investment is consistently underperforming, take a good look at it and compare the return to other similar investments.
Accounting problems
Mistakes, delays, audit qualifications and controversy over accounts can all be warning signs. Accounting rules can be complex and genuine errors or differences in views do occur, but repeated issues may indicate deeper problems. Read more about audits in our Investors Guide to Auditing.
Management problems
Director and senior management in-fighting, resignations, law breaches and unethical conduct can be warning signs. Changes in management are sometimes necessary, but it could distract management's attention from running the business.
Over-promising and under-delivering
While even the best managers can make mistakes, poor communication and falling service standards may point to something being seriously wrong.
Looking out for these warning signs should be part of a regular review of your investments. Check in to see if they are still suitable for your stage of life and if they match your ability to handle ups and downs. If your investment falls in value and you find that really upsetting, you should probably think about something lower risk.
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