6 Ways to Protect Against Investment Scams
- Before investing, diligently research the opportunity, verify the legitimacy of the company, and understand the associated risks to avoid fraudulent schemes.
- Exercise caution with investments promising unusually high returns with little or no risk, as these are common red flags for scams.
- Seek advice from qualified financial advisors to evaluate investment opportunities and ensure they align with your financial goals and risk tolerance.
It can take an entire career to build adequate funds for retirement and only a few minutes to blow those savings with the wrong investments.
Regulators across the country report a variety of investor complaints against investment schemes gone wrong, from the overly speculative to the just plain crooked. Unfortunately, one bad decision of this sort can wipe out years of diligent saving.
The Search for Better Yields
Why is this happening now? Surely, in the wake of Bernie Madoff, aren’t investors wise to the tactics of predatory investment professionals? They should be, but a combination of two things is keeping the pressure on ordinary investors to venture into riskier and more exotic investments. For one thing, with savings account rates less than 1 percent, income-starved investors are desperate for alternatives. Meanwhile, since competition and online trading have squeezed down the margins on conventional investments, many brokerage firms are looking for fatter commissions by selling more complex investment programs.
How can you protect yourself in this environment? Here are six things to remember.
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Not Much Is Guaranteed
Apart from federally insured deposit accounts and directly held (as opposed to owned through a mutual fund or other vehicle) Treasury bonds, very little in the financial world comes with a guarantee that you can count on. If someone tells you that higher returns on other investments are guaranteed, you should shy away from both the investment and the person pitching it.
Higher Yields Mean Higher Risk
Not all high-yield investments are scams. Lower-grade bonds yield more because there is a greater risk that the issuer won’t meet interest and principal payments. This can be a worthwhile risk to take, but just remember that whenever someone mentions “high-yield bonds,” they are talking about what are commonly known as junk bonds.
Packaging Can Be Expensive
The more layers an investment has, whether it is real estate properties bundled into a partnership, mutual funds bundled into a fund-of-funds program, or securities bundled into an insurance wrapper, the more middlemen are likely to be involved, each taking a cut that reduces your eventual return.
Private Investments Remove Many Key Protections
When a stock is listed on a major exchange, or a mutual fund is registered with the SEC, it means that the organizations behind those investments have to meet certain requirements for financial reporting. Private investments are often less transparent and can leave you with less legal recourse if there is trouble.
Complexity Can Obscure Serious Issues
It’s fine to hire professionals who know investments better than you do and have more resources to follow the financial markets. However, if your adviser can’t explain how an investment works in fairly simple terms, then you may want to beware. Complexity can be the smoke and mirrors that hide a scam.
Personal References Only Go So Far
Simply knowing someone who has had good results from an investment or an adviser shouldn’t be good enough. From Ponzi to Madoff, early payoffs have been used to rope in wider circles of investors. Invest with federally registered advisers in registered investments, and even then always keep your guard up.
The simple truth is that bank rates today are not very inspiring. However, when you measure the possibility of a catastrophic loss against the security of FDIC insurance, savings accounts suddenly look more attractive again.
Steps You Can Take to Protect Yourself Against Investment Scams
Navigating the investment landscape requires vigilance and informed decision-making to safeguard against potential scams.
In this section, we explore key strategies for investors to protect themselves from fraudulent schemes, offering insights on research, diversification, red flags, professional advice, and secure platforms in the dynamic world of investments.
1. Conduct Thorough Research
Before making any investment, research the company or investment opportunity extensively. Look for credible sources of information, including financial statements, regulatory filings, and independent reviews.
2. Verify Credentials
Check the credentials of individuals or firms offering investment opportunities. Ensure they are registered with relevant regulatory authorities and have a clean track record. Be wary of unsolicited investment offers.
3. Diversify Your Portfolio
Diversification is a crucial risk mitigation strategy. Avoid putting all your funds into a single investment. Spread your investments across different assets to lessen the impact of potential losses.
4. Watch for Red Flags
Be alert to common warning signs of scams, such as guaranteed high returns with low risk, pressure tactics to invest quickly, or promises of exclusive, secret opportunities. If something seems too good to be true, it probably is.
5. Stay Informed About Scams
Keep yourself informed about the latest investment scams and fraud tactics. Stay connected with financial news, and be cautious of emerging trends that scammers might exploit.
6. Seek Professional Advice
Consult with financial professionals, such as certified financial planners or investment advisors, for expert advice. They can help you navigate complex investment decisions and provide insights into potential risks.
7. Stay Skeptical of Unusual Investments
Exercise caution when considering investments in unconventional or unfamiliar markets. Scammers often target individuals with promises of unique and high-return opportunities in unregulated sectors.
8. Use Secure and Reputable Platforms
If investing through online platforms, ensure they are reputable and use robust security measures. Avoid sharing sensitive information on platforms that lack proper encryption and authentication.
By adopting these strategies, investors can lower the risk of falling victim to investment scams and protect their hard-earned money.
