“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.
You might also like:
- The Snowball – How compound interest can make you rich
- Building a low cost investment portfolio of Index Funds
- Stealth Wealth – How you can become the Millionaire next door