The Wealth Spa

Investment Fraud: If It’s Too Good to Be True …

Posted on 12. Sep, 2008 by Elizabeth Potts Weinstein in Finance

… than it probably is.

You’ve seen the slogans for the investments and get rich quick schemes – earn 10% return each month, high returns guaranteed, no risk investment, guaranteed to get your money back in just 30 days.

The general principal is that the only way to get more return is to expose yourself to more risk.  For example, if you want just 5% return, you can get an FDIC-insured 1-year CD, with no loss-of-principal risk (just a little risk of inflation and devaluation of the dollar).  But if you want 10% return, you must invest in equities, like mutual funds that invest in the stock of large companies — exposing you to a real risk that you may loose your money.  And if you want 10% return each month … then you are probably investing in speculative and illiquid real estate partnerships, small growth companies, investment trusts, hedge funds, or (hopefully not) pyramid schemes.  

There are legitimate alternative investments that, while risky, do provide a way to diversify your investments, and have a potential for large appreciation or cash flow.  But how do you evaluate a great business opportunity or investment to decide if it is real or just a scam?

Get the Data. Before you sign up, you must review their financial information and actual results or annual reports — something that proves up their claims.  If they refuse to give them to you (allegedly because they only give them to people who are serious enough to fork over money), then run for the hills.  Any legitimate investment will give you financials.

Look for Reviews and Referrals. Go online and search for independent evaluations, or even former investors, to determine the “buzz” around this investment.  Have they be written about in mainstream press?  Any angry former investors blogging about their experience?  Any objective, independent reviews?

Check for Investigations. Search the web for stories about this investment. Check out the Securities and Exchange Commission website at http://www.sec.gov/investor.shtml.  Any investigations by the SEC or local police?

Ask Your Advisor. Schedule a coaching appointment with me, or your current independent financial advisor or business coach, to review the investment and determine if it is legitimate, and a good match for your needs.

Evaluate It Yourself. Do they pay more interest than is possible?  Does it only make money by bringing in new investors?  How are they making money?  Do they have an actual product or service they are selling?  How is it sustainable over the long term?  Does it seem to be too good to be true?

If you apply a basic “smell test” to the investments and business opportunities in your path, you should be able to steer clear of the fraud without missing out on legitimate opportunities.  And, if there is any question, as an independent expert!

The Wealth Spa Minute:  The next time you learn about a new business idea or investment, don’t just jump on it.  Do your due diligence, speak to your advisor, and sleep on it.  Learn the difference between being decisive, and foolish!

This article was featured on the Money Hacks Carnival on the Moolanomy Blog.

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Tags: fraud, independent evaluations, investing, investment fraud, pyramid schemes