How to Avoid Investment Scams

We all want to make more money.

And, for many, the dream is to make money quickly and with a minimal amount of work.  This is why investing is such a popular method of making money.

If you take a measured approach, you should be able to regularly invest in carefully chosen stocks, index funds or some other boring investment, and, over time, amass a reasonable amount of wealth as you receive returns on your investment.

Many people, though, don’t want to take the measured approach.

There are stories of people making money fast by choosing the right investment, at the right time.

How many of us regular folks harbor the dream of, perhaps, taking $10,000 in capital and turning it quickly and painlessly into ten times that amount?

The unfortunate truth is that investments that promise such riches, fast and easy, are usually scams.

Does that Investment Send Up Red Flags?

investment red flags

Watch out for investment red flags!

Before you embark on an investment journey, you need to see if it raises red flags.

For the most part, a straightforward investment that you find via a legitimate online broker, or as part of your company’s retirement plan, probably isn’t a scam (although it may not be the best investment for you).

Here are some red flags that indicate that you could soon be the victim of a scam:

Promises of high gains with low risks

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This is one of the biggest red flags in the world of investment scams.

Anyone who tells you that you can see huge gains, especially in a short amount of time, without being exposed to risk, is probably a huckster.

Watch out for the words, “sure thing.”  There is no sure thing when it comes to an investment.  Even the most boring index funds — even U.S. Treasuries — have an element of risk.

Someone who shows a history of no losses, or almost no losses, is probably making up information, or using shady accounting practices.  Remember Bernie Madoff?

You are getting access to “inside” information

If you are told that the information you receive is “special” or “inside,” it could be a sign that you are dealing with a scammer.

Also, be wary of those who keep telling you that you are “elite” or “exclusive.”  The point is to make you feel special.

The truth, though, is that most of the legitimate investment opportunities are accessible, in some way, to almost anyone.  Watch out, too, for those who say that you have passed a special “screening” process to be approved.  That’s one more trick to make you think that you are dealing with something legitimate.

You have to make a decision quickly

Anytime you are pressured heavily to make a decision quickly, especially within the next 24 to 72 hours, you are staring at a red flag.

The truth is that you will still be able to invest in legitimate ETF, bond or REIT next week.  And if you can’t buy that foreclosure this month, there will be other attractive properties, not being hawked by someone shady, available next month.

If someone is putting undue pressure on you to decide right now and get together a large amount of capital within a couple of days, you might want to reconsider.

You have to be on the alert for investment scams.

Instead of expecting that you can make a great deal of money by following someone else’s “hot tip,” it pays more in the long run to formulate your own, more stolid, investment plan.

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Published or updated October 24, 2012.

Comments

  1. “There’s no such thing as a free lunch” is just as true today as it was when it was coined several decades ago (according to Wikipedia).

  2. Another good rule of thumb is one followed by Warren Buffett: If you don’t understand it, don’t invest in it.

    • That;s certainly a good one. Makes so much sense too. If you can’t understand an investment how can you really measure an investment’s worth?

    • True that. The sure way to not get shafted is to not let anyone else do the investing for you. Always do your due diligence.

  3. If it sounds too good to be true, it probably is… that mantra has kept me out of trouble on many occasions.

  4. Anyone in the world of finance telling you something is without risks or has to be decided on quickly is guaranteed to be a scammer. A real professional will make sure you are taking the time to evaluate all angles before making an important financial decision. Thanks for sharing these tips! More people need to understand that scammers exist in every field and learn how to spot them!

  5. Joe Morgan says:

    A little knowledge and some common sense goes a long way to avoiding investment scams… so many tips can be summed up in the age old adage:

    If it seems to good to be true, it probably is…

  6. Great article and comments, all true. Another red flag is an advisor who won’t place your assets with a third party custodian such as Fidelity,
    Schwab, or even a broker like Merrill Lynch. This was one of the main components of the Madoff fraud. If you are ever in a meeting with a financial advisor who says that you don’t need a 3rd party custodian or that he will send you his own statements get up and leave the meeting NOW.

  7. the information was very educating.i just wish i knew all of this before making most of the investment mistakes i have made.All the the same, am happy i got this information today.Keep the good work and remain blessed.

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