4 ways to be an easy mark for investor fraud

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Don't be like FryGrowing your wealth through sensible investing can seem like an agonizingly slow process sometimes. Even in a great year when the stock market returns 15 percent, it takes a whole year to make $1,500 on a $10,000 investment. Toss in there years where the markets show flat or negative returns, and it can sometimes feel like you’re stuck on a treadmill.

That’s probably why promising huge, guaranteed returns with no plans to ever actually return peoples’ money continues to be such a great business in the U.S.; more than $20 billion was stolen through investor fraud in 2011 and 2012, according to estimates from the Department of Justice.

A recent study from the Financial Industry Regulatory Authority, or FINRA, sheds some light into why people fall for investment scams. Here’s what it had to say on how to be an ideal mark for grifters.

  1. Have no clue what a realistic return is. Of the random sample of Americans FINRA called, 48 percent found a pitch that promised “from 2 percent to 3.4 percent daily depending on the investment plan you choose” appealing. To get an idea of what that really means, if I invested $1,000 at a daily rate of 3.4 percent on Jan. 1 and took it out on Dec. 31, I’d get back $199,523,690.88. Sit back and marinate on that for a second. Why on Earth would anyone ever give you an annual return of nearly 20 million percent? Is your money that much better than everyone else’s? Bottom line: If anyone ever says the words “daily return” or makes promises about future returns at all, run away. Legitimate investment professionals don’t do that.
  2. Believe any return not explicitly backed by the federal government is guaranteed. Of those FINRA surveyed, the majority said they found promises of guaranteed returns appealing. Probably a similar percentage would be really excited about a bag of heirloom magic beans or a great deal on oceanfront condos in Arizona. Bottom line: Unless they can print dollars like the U.S. government can, it’s darn near impossible for anyone to guarantee a return. Most of the people doing it are frauds.
  3. Mix friendship and family with investing. Lots of victims of financial fraud report being scammed by their family and friends, known as “affinity fraud.” Of those surveyed, 1 in 6 said they’d been taken advantage of by a family member in a way that resulted in a significant financial loss, and 15 percent said they’d been taken advantage of by a friend. Bottom line: If a friend or family member solicits you for an investment, be very skeptical
  4. Be too open-minded, friendly or conscientious. While those are usually considered positive qualities, the study results suggest they put you at risk of losing money to investment fraud. Bottom line: When dealing with strangers bearing unsolicited investment offers, pretend you’re a jerk and tell them to get lost.

What do you think? Have you ever been approached by an investment scammer?

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One Response to “4 ways to be an easy mark for investor fraud”

  1. Meg says:

    Good tips! I would like to add another one – My red flag is to avoid any “investing opportunities” that you hear about on the radio. I vividly recall hearing ads on the radio for “How to invest in tech stocks” just before the tech bubble popped and then a few years later hearing radio ads for “how to flip houses” just before the housing market collapsed.

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