How to avoid investment scams – top tips

“A fool and his money are easily parted”. This proverb is succinct advice about how to avoid losing money in general. Investment scams have been around for a long time and it is important to know how these can be avoided. The tips provided here are not by any means conclusive but are my take based on personal knowledge and experience.

Basic financial education helps

The publication of this post is timely, as there is currently a campaign in the UK which is raising awareness about pension fraud. Aimed at vulnerable retirees, the campaign is run by the FCA (Financial Conduct Authority).

Since pension freedoms were introduced, many have been having access to relatively large sums of money quickly. A lot of it ends up in very low interest savings accounts and the other may be deployed in all sorts of ways with the aim to gain better returns.

According to the regulator, victims lost an average of £91,000 in 2017 and 32% of 45 – 65 year olds can not identify a genuine pensions provider.

I find this shocking; it is quite sad how workers can retire with unnecessarily reduced incomes after working at their jobs diligently for decades. The scammers are very sophisticated and know their targets well so it is not surprising when unknowledgeable people get conned.

If it looks to good to be true, it probably is

The bait to investment scams seems to be excitement and a get rich quick mentality. Good investing should be boring, deliberate, long term and disciplined.

As legendary investor Warren Buffet said “Inactivity strikes us as intelligent behaviour” and “Lethargy bordering on sloth remains the cornerstone of our investment style”. Scammers often promise very quick big returns on exotic “investments” such as the following:

  • Gold or mines
  • Foreign real estate
  • Shares in the next Google or Facebook hot stock
  • Paintings or art items
  • Green energy schemes
  • The latest lucrative cryptocurrency

These should be best avoided and probably do not even exist. To make things worse most of these schemes would not be even protected by the relevant financial regulatory authorities, leaving you to carry all the losses once the money is gone.

A major benefit of being in the Financial Independence and potentially Early Retirement movement is that you can gain good knowledge about various investment and retirement accounts, along with what to invest in at an early stage.

Costs and long term strategy matter

The key thing in investments is to keep costs low. This can be achieved by following the advice and strategies outlined on this blog and set out by the founder of Vanguard investments, Jack Bogle. The sure path to wealth is to take the long term view, investing in funds which track the whole stock market, while minimising costs to as low as possible. By doing this, you will effectively be taking ownership of real businesses which generate revenues by providing goods and services.

This can be achieved by buying and holding simple index funds (e.g. for the FTSE All Share, S&P 500 or global) which typically cost less than 0.1% a year in fees. Trying to beat the stock market returns by investing in actively managed funds is a loser’s game as these are very costly due to high management charges and the additional frictional costs of frequent trading.

It is easy to think that financial literacy is common sense. However, as studies including the S&P Global FinLit Survey have shown, in most countries less than half of the population is not financially literate, making them easy pickings for scammers. The detailed analysis, based on responses to a few basic questions, shows that just a third of the global population is financially literate.

Good starting points for investment information are the Bogleheads UK site and the books below. Knowledge is power; self education about these matters will surely help you avoid investment pitfalls.

     

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4 thoughts on “How to avoid investment scams – top tips

  1. Financially Free

    From my experience, any promise of 50% return or more per yer is a guaranteed scam or a pyramid scheme.

    Some investments with 30-40% interest are legit but rare.

    I have not yet seen any scammers offer less than 20% per year. It might be a horrible investment and very high risk, but probably not scam.

    Reply
    1. Simba Post author

      FF,

      I generally consider the long term return of the stock market (8 – 10%) to be an excellent return which is difficult to beat with other investments or schemes. If anything more is promised i will definitely consider it fishy, I guess that’s how scammers rope in people with a get rich quick mentality.

      Cheers

      Reply
      1. Mark

        I agree on the 8% – 10%. I’ve averaged about 10% on diversified investments over the past 20 years and I’m happy with that.

        I’m skeptical on anything offering over 15% for the long term. There were a lot of UK P2P sites that used to pay 15% -20%, but no longer. 7% with a larger UK P2P lender is a good return these days, average is around 5%. They are regulated though so lower risk = lower return.

        Keep up the good work!

        Reply
        1. Simba Post author

          Mark,

          Thanks for the info. 10% is a pretty good return. I am getting a similar level over the past few years in diversified stock market index funds. I don’t know much about P2P but anything over 15% would concern me.

          Thanks

          Reply

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