Investing comes with countless benefits, many of which we have discussed in previous blogs, but it also comes with risks. Being able to understand what to look for before entering into a new investment can save you a lot of time and hassle when it comes to those investing risks. One of the best things anyone can do is proper due diligence on their new potential investment.
What is Due Diligence?
Due diligence is the step by step process one takes to help protect their IRA from investment fraud and to determine if it is the right investment for their IRA. Due diligence is what forces you to uncover the facts about the investment and make a rational decision. And there are two types of due diligence: that which is done on the investment itself and the other which involves thoroughly vetting the one offering the investment.
It’s crucial to not only look at the investment itself and determine if it is worth it, but to also consider who you may be entering into business with, as well. Sometimes you may be confident in the investment, but still have hesitations about the investor. If you are ever nervous, you should always do more due diligence.
Why is Due Diligence Important?
It is important to be more cautious when you are investing your IRA funds. Doing due diligence ensures that you don’t make the wrong decision and jeopardize your future retirement. One bad investment could leave your IRA with nothing!
The reason investment fraud succeeds is because people are lured into emotional decisions by the con artist without first completing their due diligence! Investing in things you are familiar with and know very well can help lessen the risk of getting scammed, since you will be very aware of what to look out for.
Doing Due Diligence
The due diligence process begins with asking yourself broad general questions. It then narrows down to specific questions about the investment depending on the type. Asking yourself questions like, does the investment offer make good business common sense?” or “how exactly does this investment strategy create above market returns?” If you can’t explain it, there’s a likely chance it could be fraud.
It’s true that all investments have risk and there is always a constant battle between risk and reward. If at any point during the process you find that the investment has too great a risk for the amount of return or has a high probability of fraud, then you should stop the process and move on to another investment! The more you know about the investment the better you will be able to judge whether the risks are balanced by the reward and whether investment fraud could be possible. If you ever have questions about doing your due diligence or investing in your Self-Directed IRA, give an IRA Specialist a call today at 855-FUN-IRAS. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.