Questions to Ask Before Changing Investments

• Does the higher return from the investment come with increased risk?, Invariably the answer is yes. The relationship between risk and return in the investment world is quite robust. The promise of higher return is almost always associated with greater risk and an increased possibility of investment losses.
• Do you understand how the investment operates?, The quest for higher return could lead you to very complex investments, a sampling of which we describe below. If you do not fully understand how your investments function, you could find yourself surprised by outcomes you didn't expect, such as illiquidity, exit fees, loss of principal or the return of your investment in a form other than cash.
• What are the costs and fees associated with the new investment?, Not only is the promise of higher return associated with greater risk, but some of these investments have higher costs as well. For example, hedge funds and structured products can be very costly, and since some of the costs are built into their return, it can be difficult to know what you are truly paying.
• Is the product callable?, Some investments are callable after a period of time, which means that the issuer can redeem the investment prior to the investment reaching maturity. For example, if interest rates fall, the issuer can save money by buying back an investment from you and issuing a new investment at a lower interest rate. If the issuer chooses to call the investment and you want to reinvest, you may find it difficult or impossible to find an equivalent investment paying rates as high as the original rate, a phenomenon known as reinvestment risk.
• Could the new investment be fraudulent?, Legitimate investments that promise returns of 30, 50 or even 100 percent per year without any risk to your principal simply do not exist. Always independently verify who you are dealing with and whether the seller of the investment is licensed to do business with you. You can confirm the status of an individual broker or firm, or an investment adviser firm representative, using FINRA's BrokerCheck.