There are sharks everywhere!

Personal finance and investing is DIFFICULT.

It is difficult because you have to struggle against the most powerful forces the universe has prepared for you: GREED and FEAR.

When it comes to personal finance and investing, the most tricky part is to develop a certain degree of common sense towards knowing when a investment is genuine and meets your risk-return trade-off. This common sense comes from firstly knowing what the investment product is about from the potential returns versus the potential pitfalls (losses/risks) of losing your entire investment monies.

Scams, ponzi schemes and other “quick and lucrative returns” investments

The basic principle in investment is that there is a risk-return trade-off to any type of investment product. The safer an investment where the risk of losing your investment monies is low, the lower the returns you can expect to obtain. Treasury bills invested with the Singapore Government are very safe. Their returns are low, around 1%+. But they are still higher than your bank savings giving you 0.25% returns. Equities are riskier than treasury bills, potential returns can be double digits but so can the potential losses if you are not able to hold the investments for a longer term during market downturns like the current situation.

There are many investments out there that promise high returns and low risks in a short period of time. Genuine investments that can do so do exist. But they are hard to find. Most investments that may yield high returns also require taking a high level of risk. There are many foreign exchange courses in the mass media. They promise that you can make thousands or tens of thousands in one day. They conveniently forget to tell you that you can also lose thousands or even more through foreign exchange trading or options trading.

The article above highlights the risks of investments sold through multi-level marketing channels. The Sunshine Empire business has been put under investigation by the Commercial Affairs Department as well as being under MAS’s investor watchlist. Those are signs that all is not well with this investment. So how do you avoid making the same mistakes as those who were taken in by the promises of “quick and lucrative returns”?

How to avoid scams, ponzi schemes and other schemes

1. Understand the investment product

What is it? If you are unable to explain it to a friend or relative in layman terms, then that’s a sign that you don’t really understand what the investment does and how does it generate the returns. One useful rule I learnt from reading “One Up on Wall Street” by Peter Lynch is to ask yourself for 3 reasons why you are holding on to a particular stock in a company. You can apply the same rules to investing in the proposed product.

2. Understand the risk-return trade-off

Investments are inherently risky. Some are more so than others. Always ask, what is the potential risks that I am exposed to? This can be losing ALL of your investments as what some DBS High Notes 5 and Lehman Mini-bonds investors are potentially facing. It could be losing just the interest or returns but getting back your principal. Assess if you are able to accept such risks and what is the potential returns that should more than adequately compensate your for taking such risks.

3. Understand yourself

This is key to avoiding investment mistakes. If you do not understand the investment, acknowledge it and stay within what you understand. Gain knowledge about the new or potential investment first before putting any dollar into it. There are many blogs available and investment websites. Google for more information. Visit public libraries and read investment books. Learn more first before putting your money.

Also develop your personal net worth and how much money can you afford to invest. You need to have 3-6 months cash or cash equivalents emergency fund before starting to accumulate your investment capital. Read books such as “Your Money or Your Life” to find out how you can learn to live within your means in order to start saving and investing.

In short, invest in developing your own knowledge and skills about personal finance and investments and avoid LOSING money first before learning to invest your monies.

Do you know of other scams that you have come across in your life? Share with Panzer via the comments section.

Be well and prosper.