April 22, 2024

How to spot a fad investment and help wealth management clients avoid one

Sometimes when an opportunity seems too good to be true, it’s because it is.

Since the beginning of capitalism, investing has been prone to bubbles and fads. During the “tulip mania” of the 1630s, the price of a tulip bulb in Holland soared past six times the average Dutchman’s salary — and then, just as quickly, collapsed. In the United States in the 1990s, the floppy stuffed animals known as Beanie Babies were auctioned off for thousands of dollars apiece — and then, just a few years later, their prices returned to the single digits.

Today there’s Trump Media. Last week, the former president’s social media company enjoyed an explosive IPO, with its stock reaching $57.99 per share and the company valued at about $8 billion.

Less than a week later, the bubble burst. On Monday, Trump Media revealed that it had lost more than $58 million in 2023, and the news sent its stock tumbling by 21%. By the end of the day, the company had lost $4 billion in value, according to CBS News.

In each case, investors who jumped on the bandwagon were left with badly devalued stocks, seeds or teddy bears. And yet when they bought in, it seemed like too good a chance to pass up.

READ MORE: 4 red flags that a retirement investment is a scam

“Fad investments are hard to resist,” said Crystal McKeon, a certified financial planner at TSA Wealth Management in Houston, Texas. “The skyrocketing prices make you feel like you’re missing out and you’re the only idiot not making a fortune.”

How can investors avoid this temptation? One answer is for a financial advisor to steer them away from it. But how can advisors spot a fad investment when they see one? Luckily, wealth managers with plenty of experience talking clients out of boondoggles have pinpointed the red flags. Here’s what to look out for:

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