With the recent coverage on financial scams all over the news for the past week from “money games” to forex schemes, along with the fact that over the years we have had different forms of pyramid or Ponzi schemes popping up like wild mushrooms after the rain, with the most famous being Madoffs’ Ponzi scheme that was uncovered in 2008, I decided to write this article to help protect you and your hard earned money from being scammed. This is also written for the people who are potentially promoting a scam unknowingly, so that if you happen to be promoting one, you can take the necessary steps to protect yourself from the scam and even more importantly to protect your own reputation and credibility.
What is a scam anyway? A scam is defined as “getting (something, such as money) by deceiving someone.” The key word here is deception, and in order for us to overcome deception, we really have to inform and educate ourselves financially, to have the ability to see through the lies and deceit, and in most cases be able to identify information that is being withheld from us. However, the problem is that most people do not have the financial knowledge to identify these lies and even more importantly, most people do not know the right questions to ask.
I believe that if it seems too good to be true, then more diligence is due. It is easy for us to just wave off everything that sounds “too good to be true” at the expense of us possibly missing out on real, legitimate, and feasible opportunities. We always want to have a balance between being open to opportunities and carrying out our due diligence.
So here are the fundamental questions that every successful investor should ask:
How much is the investment?
This should be a given, everyone should know how much is expected of them to put into the “investment”. Sometimes it is also useful to ask if a lower amount of investment is acceptable to match what you are comfortable with investing given the risks involved. Just because a certain sum has been proposed to you, it does not mean it is the absolute “normal” or “standard” figure in the industry. For example, some forex brokerages could ask for $10,000 USD as the minimum investment, while others could go as low as $50 USD. In some instances, a higher amount is requested just because the broker wants to get higher commissions with total disregard to your own personal risk tolerance.
What is my NET return on investment (ROI)?
This is to identify how much upside I can expect from my investment, and there is also an emphasis on the word NET because with some investments there are hidden “management” costs involved in the fine print that will cut into your final returns; you can see this prevalent in mutual and hedge funds for example.
In what form will my ROI be paid out?
Will it be in cash or other forms? Will I accept anything other than cash? If it is in other forms, how liquid is it and what are the potential costs incurred in its liquidation into cash?
Returns can come in various forms, especially in recent history there has been a lot of talk about virtual currency. If it takes the form of virtual currency for example, how widely accepted is it? What are the costs involved in converting it into cash? Just like how we have to incur costs while doing foreign exchange from the USD to GBP, there are costs involved in converting virtual currency to your currency of choice through the exchange spread. I will also be writing a follow-up article soon on why cash is not the best thing to have so make sure you are subscribed or are following my social media accounts if you are interested so that you will know when my next article is up.
When can I expect my ROI?
It is great if you can double your money, but over 50 years? Maybe not so much. That is why it is always important to know the actual time frame and payment schedules.
There are a lot of people who just stop right here and accept whatever that is being presented to them because either the person presenting the opportunity to them is someone they trust, or they are just unaware of what other important questions to ask.
It is important for us to know that it is okay to ask questions especially when it comes to investing our own hard-earned money, as it is our right regardless of who it is that is presenting to us, be it friends, family, acquaintances, someone of authority, or just a really convincing person. If the person is taking it personally, then it is their problem, and shows that they are more concerned about their self-interest than yours, or a reflection of their impatience.
How will my money be invested?
What is the vehicle you are investing in? Is it in a new or existing business, forex trading, stocks trading, mutual fund, bonds, etc.?
Do the people handling my money have the knowledge, technical know-how, and ability to execute the plan successfully, and do they have a history of success in that area?
If you were to bet on a racer, would you bet on someone who just claims to be a great racer or one who has a proven track record of winning?
How do I know if they actually have all of the above capabilities, other than what has been presented to me?
If a track record is being presented to me, how can I identify that it is actually legitimate? Is there a way to find out its legitimacy such as an independent audit? Or perhaps some publicly-held record of the performance? It is very easy nowadays to have documents and records manipulated and distorted for the purpose of deceiving potential investors.
Do I have the technical ability to evaluate the investment accurately? Or do I need someone who is successful and/or knowledgeable in that field who does not have a vested interest to advise me?
Do I actually understand the game that is being played? Along with the language that is being used in the game? Many investment schemes and scams have their own complex language whether intentionally or unintentionally to confuse potential investors and to position the people within the industry to have more of an authoritative position over “normal” people, so that we have to just buy into what they are saying and just trust in them. In cases where we do not know the game, we have 2 options, either we choose not to invest because we are going into the dark and may be only led by someone with a vested interest (something to gain for themselves); or we find someone who understands the game and language who has no vested interest in the deal to advise us accordingly.
What is the risk and security of my funds invested?
How risky is the investment? Is it possible to lose all of my money? Are there any tangible or intangible assets to back and secure my invested funds? With every investment there is invariably a risk involved, if there is anyone out there who says there are no risks involved, they are either lying, unaware, or are speaking under specific contexts and assumptions. We can accept assumptions to a certain degree and we need to make assumptions most of the time to make a decision when investing into the future, but we need to be clear on what those assumptions are, so that we know in the case any of these assumptions change or are broken in the future, so will the risk of the investment. Just like when the Malaysian one sen coin was still in circulation, if a person converted all of their money into the one sen coin, they would have been able to have a “guaranteed” higher return on investment because the raw material that makes up the coin is worth more than the face value of the coin, but that is under the assumption that you are able to find a buyer, and that the prices of the raw material per coin maintains higher than the face value of the coin. To be a successful investor, we need to think in terms of probabilities rather than absolutes, to know that there are plenty of variables that are affecting our investments, some of which we are aware of, and there are many which we may not be aware of that will affect the likelihood of success and failure.
Are there any guarantees given?
If yes, then remember, a guarantee is only as good as the guarantor. Is the business the guarantor, insurance company or body, personal guarantor? Is all of this in writing? Under which country’s laws and jurisdiction? In the case of failure in the investment, and subsequently failure of the guarantors, what happens next? For example, if a business is the guarantor, do they have the assets or liquidity to pay out investors in the case of failure? What happens if they go into bankruptcy where potentially none of the investment can be recuperated from the company? If it is a personal guarantor it would be the same as well, and even when the guarantor has the ability to pay, what if they refuse? Hence this is where the legal system is here to give a layer of protection to investors, but even then as I mentioned, when it comes to cases where either the business entity or person declares bankruptcy, the investors could lose everything.
Can I withdraw my initial investment/capital at any time or only after a fixed time frame? Will there be any penalties incurred if I do an early withdrawal?
This will determine how liquid your investment is, i.e. if you needed the money immediately, how fast would you be able to get it back? Understandably with every investment, there needs to be a certain time frame for the fund managers to invest and grow your money, if your money has already been invested into a property development project for example, you cannot expect to have it returned immediately when all of that cash has been converted into raw building materials. This also explains why sometimes there will be penalties incurred, whereby you may get back less than what you initially invested.
Are there any relevant regulatory bodies overlooking this investment or industry?
For example, the Central bank, Financial Services Authority, Securities Commissions, etc. Is the body approved by the governing authorities?
Businesses tend not to have any regulatory bodies overlooking them when it comes to raising finance unless it is a publicly traded entity i.e. traded in the stock markets. So inherently there is a higher risk involved in these entities. For financial products such as stocks or currency trading, there are Securities Exchange Commission or your country’s equivalent involved, for example, the Financial Services Authority for the UK and Securities Commission for the US.
What are my personal investment goals?
There is a saying that says “If you do not know what you stand for, you will fall for everything”. The same can be said when it comes to investments – if you do not know what your own personal investment goals are, your own risk tolerance, awareness of your own financial knowledge, you will be vulnerable to falling prey to scammers.
How much am I willing to risk given the timeframe, potential ROI, and downside?
We all have our own individual risk profiles, and for some of us we have different size of funds for different risks. For example if you set aside 20% of your current income for investments, how much of that is put into “safe” investments such as fixed deposits or gold? How much of it is put in moderate risks investments such as blue chip stocks? How much of it is put in high risk investments such as new business ventures or forex trading?
Another way to look at it is – how much of my investment do I want to be as safe as can be? How much of my investments am I willing to lose xx% of? How much of my investments am I willing to lose all of?
There is no set “right” or “wrong” formula, just what is recommended, and what you feel is right for you given where you are at in your life right now. So be clear with what you want and what you are willing to risk before you enter into the world of investments. This article is not here to tell you what to invest and not to invest in, but rather for you to have the information to make a decision for yourself, even if at the end of the day you decide to invest in a Ponzi scheme, as long as you are aware of what you are getting into, and the risks involved, I believe everybody has a right to do so with their own money. What I am not okay with is people being unaware and getting cheated into risky or bullshit investment schemes, where you hear stories of people putting their entire life savings into a phony investment only to end up losing it all.
If you found this useful, do share this article with your friends and family to help inform and protect themselves. Also, remember to follow my social media accounts and subscribe to my newsletters for more helpful articles to become a better investor.