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5 Ways to Know That Investment Scam Stinks

Posted By Miranda Marquit On 02/02/2011 @ 7:12 am In Investing | 8 Comments

I have to be honest. At my home, we’re fans of the Yankees, since that’s the team my husband grew up rooting for during is childhood in New York. But I still feel bad for the New York Mets. Or at least,  I feel bad for Fred Wilpon, who is on the verge of losing the New York Mets [3] as his finances spiral downward fast. Not only did he get taken in by scam artist Bernie Madoff, but he is also facing a lawsuit alleging that he should have known better — with the implication that maybe Wilpon was an accomplice.

This just goes to show that you might lose more than money when you are taken in by an investment scam. You could lose something that you really love (as Wilpon is likely to lose the Mets), and you could even lose your reputation. Before you invest, watch for these signs that you are being scammed:

1. You Are Part of an “Exclusive” or “Elite” Group

One of the signs of an investment scam is that you are told that you are part of an elite or exclusive group “chosen” to participate. The idea is to make you feel special, as though you are an insider. Scammers put up a front, acting as though only very specific people will be let in. In some cases, you really are “exclusive” since you have to put up a buy in. If someone comes to with a “special” investment opportunity, only open to a few, it’s time to be careful.

2. Promise of High Gains with Low Risks

Watch out if you are being promised great riches at minimal risk. Investment works this way: The bigger the risk of loss, the bigger your chance of more money. In the investment world, big gains rarely come with low risks. If someone tells you that you can make a lot of money with almost know risk, or that it’s a “sure thing”, you might be looking at an investment scam.

3. The Investment History Never Shows Losses

The truth is that during a down market, just about everyone is going to see some losses. Even during good years, gains in investments tend to vary a bit. If the investment opportunity shows a balance sheet of steady gains, or if the return is like clockwork, there could be a very real chance that you are looking at an investment scam. Everyone thought Bernie Madoff was so great because his fund never showed losses. It’s easy to show gains when you’re cooking the books.

4. Complex Terminology

Look out for a lot of fancy sounding jargon. You should be able to understand what is being explained to you. If the promoter of this amazing investment opportunity can’t explain, simply, how the investment works (and “you give me money and earn a lot more” doesn’t count), you could be in trouble. Most standard investments [4], such as stocks, bonds, and funds are fairly easy to understand.

5. Undue Pressure to Make a Decision Now

One of the biggest indications that you could be looking at an investment scam is pressure to make a decision immediately. You might be told that it will be too late to invest if you don’t act now. Pressure to make a fast decision — especially if you aren’t given time to study the merits of the investment — is a sure sign that you could be heading for trouble. A legitimate investment opportunity will still be there later. You may not get as good a deal, but it will still be there. Also, be wary if you are being pressured to quickly liquidate other assets so that you can afford the buy-in.


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[3] verge of losing the New York Mets: http://blogs.forbes.com/sportsmoney/2011/01/31/money-wasnt-the-only-thing-that-madoff-stole-from-fred-wilpon/

[4] investments: http://www.bargaineering.com/articles/rebalance-investment-portfolio.html

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