Lending Club Blog

Greed: The Downfall of Many Investors

I recently started watching the CNBC series American Greed and have really been enjoying it. In each episode, a couple of high-profile cases of greed-driven fraud are profiled. While greed drives the perpetrators, it also seems to drive many of the victims.

The series covers many different types of fraudulent activities, but a recurring theme is how willingly victims agree to deal with the criminals. The promise of extraordinary returns on investments with little or no risk should raise a huge red flag. Instead, investors seem to flock to these opportunities in record numbers.

Don’t get me wrong. Amazing investment opportunities certainly do exist. Fortunes have been made in real estate, new businesses, the stock market, and many other types of investments. It’s just that those super-sized returns on investment likely came with much higher risk than less profitable alternatives. High-risk investments can be hugely successful, but also have a greater chance of being huge failures. The fear of missing out on the next big thing may also play into investors’ decision-making processes.

The risk-reward tradeoff between different investments generally holds true, but there are cases where anomalies exist. In such cases, higher returns may be possible with similar (or even less) risk. These discrepancies only go so far, though. The best returns occurring with the least risk is an outcome that likely never occurs.

Before making any investment, ask yourself if it seems too good to be true. If it does, you don’t need to dismiss the investment automatically, but you should approach it with extreme caution. If things still look positive after you’ve done your due diligence, then it might be worth considering. More often than not, digging a little deeper into the promise of low-risk, high-return investments reveals the truth that they really are too good to be true.

Have you ever invested on the promise of low-risk, high-reward returns?

Friday, February 20th, 2009 at 6:01 am

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