Avoiding scam investments: 7 things you should know

Every few years, an investment scam surfaces and clears the coffers of naive investors. Whether it is some miracle water or precious gold bars, smooth-talking salespeople will try to get you to part with your life savings in exchange for them with promises of buying them back later at a higher price.

We see scams like this all the time. The business model is often unsustainable and sounds too good to be true. The latest

Here are 7 things you should know about scam investments and if you ever come across one, avoid at all costs!

Introduce a product that is perceived to be rare or highly valuable

Scam investment operators will introduce a product into the marketplace that has a high perceived value or appears to be of limited quantity. It could be a 1 kilogram gold bar during 2011-2012 when gold prices were skyrocketing or outskirt real estate properties from a foreign country that is touted to be the next big city in the country. How about that rare coloured diamond that can’t be found anywhere else?

You are given the opportunity to buy this product at a ‘bargain’ price

You will be offered an opportunity to have a chance to own this product at a ‘bargain’ price of $5,000-$50,000 depending on the perceived value of the product. They will try to promote the potential growth in value of the product and that why you should buy now and get ahead of other investors. After all, the early bird catches the worm.

The company guarantees a high return on investment for if you keep it for a period of time

The company will promise to buy the product back from you in 1-5 years time, and make a guarantee on paper to offer you a return on investment as high as 50%! The returns are often very attractive and sound too good to be true.

They also have a referral program that rewards you for bringing in new investors

To run the investment scam on a larger scale, the company usually has a referral program for existing investors to bring in their friends as new investors in exchange for commissions. This helps them grow their pool of investors significantly and improves their cash flow.

You can usually identify a pyramid model in the investment program

The ultimate goal of an investment scam is to build a pyramid model of investors where investments from the larger base at the bottom are used to pay the commissions of the higher tier. As they introduce the business model and pricing structure of the investment plans, you can usually see a pyramid model.

The business model is not sustainable

If you try to replicate their business model, you would find that it is impossible to achieve similar returns. Then you start wondering how does this company sustain itself and make profits. That’s a clear sign to stay away.

Conclusion

If the new investment opportunity that you are exploring ticks off quite a number of boxes in this list, I’d be very careful about making that investment, no matter how lucrative it may seem.

Have you come across an investment scam before? I’d love to hear your thoughts.