Several weeks ago, I watched an episode of the CNBC show American Greed that greatly disturbed me. This show documents financial fraud cases that occur across the country. On this episode, a pastor in a local church gained the trust of his congregation and established a Ponzi scheme to fund his own extravagant lifestyle.[i] He stole millions from people that deeply trusted him. In today's world, we can never be too careful and sadly, we must carefully watch who we trust with our hard-earned money.
These schemes can happen to anyone and can be devised by people you thought were completely trustworthy. In one of the largest financial fraud cases in history, Bernie Madoff stole an estimated $18 billion.[ii] He was able to fool the SEC, the federal agency tasked with enforcing securities law, for more than a decade. So if the SEC can be fooled, how do everyday people protect their hard-earned money?
5 Tips to Avoid Investing in Fraudulent Schemes
If it sounds too good to be true" it probably is!
Remember that everyone is looking to make money. When presented with an offer that seems too good to be true ask yourself, "Why is this person telling me about it instead of doing it himself?"
Don't buy impulsively
Oftentimes, these "get rich quick" schemes work by insisting people make a decision quickly, or the opportunity will be lost. From experience, we have developed a sense that things which are difficult to possess are "typically better than those that are easy to possess."[iii] Fraudsters use this pressure to invest without giving the proper thought. Never invest in an opportunity without taking the time to thoroughly research the investment.
Stick with large, well-known funds
There is no shame in investing with large, well-known investment funds. These funds are managed by intelligent people who have advanced technology on their side. Stay away from unlisted investments.
Remember to diversify!
This is your key defense against risk.
If your gut says no, LISTEN
Finally, if your gut is telling you not to invest, don't do it. You want to be able to sleep at night after investing.
[i] http://www.cnbc.com/id/45556012. "The Mormon Madoff." American Greed (CNBC)
[ii] Safer, Morley (September 27, 2009). "The Madoff Scam: Meet The Liquidator". 60 Minutes (CBS News): pp. 1-4
[iii] Cialdini, Robert. "Influence: The Psychology of Persuasion". New York City: HarperCollins Publishers, 2007
