We are all aware that financial schemes are rampant, especially in the digital age when con artists can wreak havoc and be gone before unsuspecting targets even know what hit them. Although, baby boomers are often the targets of such schemes because they have a lifetime of money to invest, up and coming young investors are prime targets as well. This may be because they are often inexperienced, less likely to check references and company history, more likely to rely on internet sources, and under a lot of pressure to secure a sizeable retirement fund from a small savings.
Ponzi schemes are financial investment scams that promise high returns. For a while, most Ponzi schemes are sustainable. They pay old ‘investors’ from money gained from new investors, not investment proceeds as each investor assumes. As long as new investors keep the scheme flush with cash, old investors may never uncover the scheme. These schemes are rarely the decades-long scams as the one perpetrated by Ponzi “giant” Bernie Madoff during which investors, large and small, lost millions, often their life savings.
Most of us have come to recognize schemes like the email and mail scams that declare that you’ve won the lottery or will be awarded a prize for a contest you’ve never entered. We’re also mostly aware of the scam that asks us to process payments for a foreign company. And, most of us have a handle on the “Nigerian” or “419”scheme which tells a story of a close relative of a foreign monarch in need of our help to access the funds of a deceased loved one.
But, even with all of the news coverage, far too many people are unaware of what constitutes a Ponzi scheme or how to avoid one.
Sometimes, the signs are obvious. Charles Ponzi, who has the dubious distinction of being the namesake of the Ponzi scheme, actually spent time in prison before scamming investors out of millions of their hard-earned dollars. Certainly, it’s wise to avoid an investment broker with a criminal background.
Yet, Madoff had never been convicted of a crime before he was arrested for spearheading one of the biggest scams of all time, which serves as evidence that even once honest businessmen can go bad and that investors can’t always tell the difference between a scam or the real thing.
One of the best gauges of a scheme is that it sounds too good to be true. Use common sense and don’t be swayed by promises of high returns when the rest of the market isn’t providing those same returns. And, finally, never put all your eggs in one basket. Diversify your investments so that if one goes wrong, you won’t lose everything.