Finance 1. “No risk” One of the most certain warning signs of fraud is the elimination of financial risk. Many fraudsters will go out of their way to try to convince you that whatever idea they’re hocking is a “can’t lose” proposition, a “zero risk” investment or a “100% guaranteed” opportunity. Not only is this not true, it also defies one of the fundamental rules of investing: that there is no return without risk. If you remember nothing else from this article, remember this: when it comes to investing, there is no such thing as “no risk.” Anyone who tries to tell you differently is either lying to you, or trying to scam you − or very possibly both. 2. Super-high returns Often accompanying the promise of “no risk” is the promise of high returns − typically much higher than what you’d expect from publicly traded investments over a similar time frame. Wise investors understand that promises of double-digit, triple-digit or even higher annualized returns are the bait that hooks fraud victims. Ask yourself: if the opportunity is so amazing, why doesn’t everyone else know about it? If the returns are so good, why aren’t professional managers pursuing them? If the performance is so great, why isn’t the financial press clamouring over it? The answer: because the “opportunity” is actually a fraud. 3. Get-rich-quick schemes Closely related to points #1 and #2 above is the promise of speed; fraudsters will promise to double, triple or exponentially grow your money in weeks or months. Who doesn’t want that? Such promises are tempting, in part because we’ve all heard about billionaire investors and traders who are able to turn a small stake into a fortune overnight. Here’s the thing: there is no simple, certain way tomake money. Sure, sometimes traders, investors and high-tech entrepreneurs can make a lot of money quickly. But when it happens, there are typically years of financial education and investment experience behind the success, as well as several months of careful research and detailed analysis, along with a healthy dose of sheer dumb luck. Anyone who says that they’ve found a way to bypass this reality is taking you for a ride. 4. High pressure Most fraudsters work on a “do it now” schedule. The reason: they don’t want you to take the time to think critically about the opportunity, ask tough questions, or listen to that “little voice” inside your head that’s telling you that something’s not quite right. That’s why most investment fraud includes some form of “urgency message” within the sales pitch: it’s a “limited time opportunity”; you need to act now before others catch on; you need to invest before market conditions change; if you act early, you can take advantage of special terms for “early movers”; that kind of thing. All of which is intended to prey upon your fear of missing out − the idea that others are getting rich while you’re sitting around doing nothing − and encourage you to make a decision based on emotions, not analysis. 5. Complicated mechanics It’s an old trick: industry jargon, complex data sets and slick PowerPoint presentations can go a long way to making you feel as if an opportunity is legitimate. Often times, these function as the smoke andmirrors which the fraudster uses to mask the con that’s going on behind the curtain. All of this is intended to short-circuit your financial logic, and quiet that little voice inside your head telling you that something just doesn’t make sense. So remember: if you find yourself confronted with an opportunity that you can’t get your head around, or if you’re presented with information that seems to make things more complex, rather than more clear − it’s best to take a pass. 6. Proprietary trading strategies A lot of frauds attempt to explain their “high return/no risk” promise by talking about secret trading strategies, special investment algorithms, or complicated “proprietary” stock market techniques that only the promoters have figured out. This was Madoff ’s big lie − a trading strategy that only he knew about, but which he couldn’t explain to others because it was “proprietary.”The lie shielded him from closer scrutiny and led thousands of sophisticated investors to lose their shirts. Bottom line: if you can’t understand how an opportunity actually makes money, or can’t verify the claims of “secret” trading strategies, take that as a huge red flag. 7. “Next big thing” ideas Fraudsters love to talk up their scams as an opportunity to get in on the “ground floor” of new technologies, new patents or industry “revolutions.” Often, such scams are related to headlines and hot sectors that you may have heard about recently. Example: COVID-19related frauds in the form of patented drugs, new detection technology, medical supply startups or miracle treatments. Why do scammers do this? Because they know that so-called “average” investors have heard about people making a lot of money on these ideas, yet very few really understand how such technologies, patents or revolutions really work. A lot of greed and very little knowledge −you can see how that’s a pretty attractive combination to a fraudster. Common warning signs of fraud Investment fraud takes many forms, but most exhibit one or more of several common “warning signs” − features or identifiers that fraudsters use to make their scams more appealing to investors. If you can learn how to spot the following warning signs, you’ve gone a long way toward ensuring that you never become a victim. 30 | www.snowbirds.org
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