How to spot an investment scam

How to spot an investment scam

Anyone who ventures into investing will definitely come across an investment scam at some point.

But how do you know if an investment is a scam?

There is no way of actually confirming whether something is an investment scam or not. The only way to know for sure is when it finally falls through. But by then, it's too late.

There are a few tell-tale signs:

1) Extraordinarily high and consistent returns

In investing, there are two emotions that dominate - fear and greed. Investment scams prey upon both these emotions. They offerextraordinarily high returns to entice the greedy, and limit the opportunity to tempt those who fear missing out.

Beware of any scheme offering returns such as 2 per cent a month. Anything above 12-15 per cent a year bears serious looking into, especially if it promises that amount every year.

To attract you to these high returns, a common sales pitch describes how inflation is eating up all your money, and how the returns from traditional investments aren't high enough.

2) No concrete proof of where the money comes and goes

Find out where the money is being invested and where the returns come from. As a rule of thumb, 12-15 per cent p.a. returns can consistently be generated from stock markets only in good years.

Anything higher than that, and you'd have to ask how they do it, and why they're asking you, a relatively small-time investor, instead of a bank or an institutional investor, for money.

Even if they can tell you where the money comes from, it does not mean that is where they are putting the money.

For example, there is a company which conducts regular tours for its investors to a third-world country. They show the investors a fenced-off area, guarded by purported military, which is where property is supposed to be developed.

But it's very easy to just hire a few locals, give them military uniforms and weapons to pretend to guard the place.

3) You can smell the greed

Often, you are invited to a preview or seminar where you're given details of the investment. Present in the audience are existing investors of the scheme. They are often called upon to testify that the scheme works for them.

Sometimes these investors receive a cut for referring new investors into the scheme. If you're observant enough, you can smell the greed in the air. Turn around and walk away as fast as you can!

4) The company involved is in the MAS Investor Alert List

Check this list maintained by Monetary Authority of Singapore.

If the company you want to invest with is on this list, don't do it. There's a good bet that it's a real risk of a scam.

Check, check, check

Before committing to any form of investment, always do your research. It helps to check the background of the company owner and do an online search of the company.

Even stocks of suspicious companies on the Singapore Stock Exchange can be suspended, so don't be careless in checking!

Consultwho.sg helps you with your personal finance issues -- ask them a question anonymously, or connect with a financial consultant.

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