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How to Protect Yourself from Ponzi Schemes

13/01/2010


Investment guru Warren Buffet famously said, “When the tide goes out you see who is swimming naked”.  Well, the turning economic tide has resulted in a few unpleasant surprises for investors.  It seems hardly a month goes by without a news story about another Ponzi scheme defrauding victims of their life savings.

 

Though there are new variations on the theme popping up all the time, the key element of a Ponzi scheme is the use of money from new investors to pay returns to earlier investors.  Unlike legitimate investments, no profits are actually generated to support the payouts.  The persons behind the scheme have to attract more money in than they pay out in order to keep the fraud alive.  As the economy turned, the public had less money to invest and made greater efforts to access their funds.  While most legitimate investments have survived this shift, the Ponzi schemes are starting to collapse.

 

To continually attract new investors, the fraudsters promise high rates of return or some other benefit such as tax avoidance.  They use peer pressure and the fear of “missing out” to bring investors in, and use an “insiders’ secret” atmosphere to keep them there. 

 

To protect yourself, don’t be afraid to ask questions about whom you are giving your money to and what they plan to do with it.  Do a simple internet check to see if legal or regulatory action has already been taken against the parties.  Ensure the persons offering the investment are appropriately licensed.  Talk to your trusted advisor about the claims being made to help assess their validity.  Most importantly, trust your instincts!  If it sounds too good to be true, it is.

 

For more information please feel free to contact myself or your local MNP advisor.