Here are 5 Special Red Lights on Your Dashboard for Investment Scams
Many people have become wary of the stock market in recent years. After 2 disastrous episodes of bubbles bursting and huge, double digit losses in the last 15 years or so, it’s understandable that folks will be looking for investments that seem safer or offer the possibility of recouping some of their earlier losses. However, here are 5 special warning signs of a potentially deadly investment scam:
- “To dream the impossible [promise]“: When I was in college studying business an eon ago, my finance teacher laid out the basic relationship between risk and return. The higher the potential risk, the higher the returns, and vice versa. If an “investment advisor” (often just a salesperson) promises you high returns with virtually no risk, it’s likely a scam.
- Too much complexity: sketchy investments frequently bring with them hundreds of pages of “lawyerese” and investment-speak jargon. Always remember that if you don’t understand it, don’t invest in it.
- “Invest now” urgency: Remember that urgency is one of my Dead Giveaways for a scam, so it should immediately cause you to stop what you’re thinking of doing and Reach Out to Check it Out. The salesperson is not your friend and doesn’t want you to think it over or talk to others about it.
- Be careful around the following 6 words: collateralized, deferred, derivative, managed, structured, and guaranteed. I’m making a distinction here between things like the FDIC guarantee or its equivalent with credit unions and the kinds of guarantees that scammers promise but can’t deliver on. The 6 words above are most often found in dubious investments, according to Allan Roth in an article in the April-May AARP Magazine.
- Keep in mind the basic philosophy for scam prevention: “Never let yourself be chosen, always do the choosing.” If someone contacts you by phone, email, or US mail with a “can’t miss” investment opportunity, run the other way. Be especially wary of those “free lunch” investment seminars. Helaine Olen, in her book Pound Foolish: The Dark Side of the Personal Finance Industry, describes research which shows that people who attend those free lunch events are more likely to get ripped off because eating lowers a person’s guard.
A person’s investments should work for them in ways that support their life and goals. I hope you will pass along these ideas to anyone you think would benefit from them and always check with your financial advisor for the best advice for you.
Thanks for reading,
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