Money tip #82 – If something looks too good to be true…

2 min Read Published: 12 Jul 2010

....then it probably is

Our money tips are popular because we often bring technical ideas and concepts to the masses. Proving that by being a bit smarter with your finances you don’t have to work as hard to enjoy life.

But one or two of our tips are more ‘founding principles’ of dealing with your finances. While they may be more simplistic in nature their importance should not be underestimated. Today’s tip is one such idea.

I’ve lost count of the number of times I’ve heard people talk about a ‘sure thing investment’. Or people say it’s ‘a no brainer’ or a ‘dead cert’. These claims are usually followed by a sort of mass hysteria as people pile into an investment without doing any real research themselves, often getting badly burned.

The problem is that as the old saying goes, ‘’if it sounds too good to be true, then it probably is’’. Whether you are investing or looking for a good deal on your car insurance it would be wise man who took heed of this old wisdom.

You may recall that Bernie Madoff was the darling of investors as well as the rich and famous with his impressive investment record. The returns on his wealth management business were exceptional and it was only the fortunate and wealthy who were able to invest and reap the benefits of his genius. As everyone now knows the business turned out to be nothing more than a Ponzi Scheme and it is estimated to have lost investors $18 billion.

The problem is that greed is one of human nature’s biggest faults and the thought of missing out on the chance of a lifetime is, for some, too much to pass up. But with the powers of hindsight (if only it were that easy in reality) there were warning signs of what Madoff was up to. But no one was looking for them, there was money to be made.

It could be argued that this greed is what got the UK into the mess we currently find ourselves in. A booming economy led to the government claiming that the boom and bust days were over. The idea of saving for a rainy day went out of the window and they ramped up the public sector. But, again with hindsight, how wrong they were. The thing is everyone bought it. If somebody tells you that they saw the credit crunch coming they are either deluded or lying. Just ask yourself why the TV was full of property programmes and why everyone was watching them? Everyone believed that property prices were a one-way bet and that anyone could buy a clapped out house and splash a bit of paint on it and sell it for a huge profit. The fact is some did, but they were lucky. The problem was that the whole housing market was built on the availability of credit. Consequently, when banks were throwing the stuff at people house prices went through the roof. But then once the credit crunch hit, house prices plummeted. But regardless of this fact, if it were really that easy to get rich off property why would anyone go to work? Everyone lost touch with reality.

But as I said, this ‘too good to be true’ notion is applicable to all areas of finance. Even for something as straightforward as car insurance it has it’s place. That cheap quote you’ve found may be loads cheaper than your current deal, but there is probably a reason for it. If you look at what the cheap policy actually covers you will probably find that that the answer is ‘not a lot’. Have a crash and you could end up paying out a lot more than that original premium saving.

So if you only take notice of one Money Tip from our blog this is not a bad place to start.

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