Ready to Start Investing? 6 Tips for Avoiding Scams
You’ve worked hard to get where you are financially, and investing might seem like the next step. But sometimes the financial landscape (and especially the internet) is like the Wild West. Let’s go through some tips to have in mind and common pitfalls to watch out for when you start investing.
Know Your “Why”
With any investment, start with your “why” – this includes specific financial goals you want to reach, the dollar amounts your goals will require, and the time horizon on which you hope to accomplish your goals.
If you’re looking to “get rich quick,” that is not a realistic or healthy goal for your investments. Likewise, if you’re seeking a “no-risk investment,” that is another red flag.
Guaranteed Rate of Return
Investing, by its very definition, involves some level of risk (although you can choose low-risk or high-risk investment options depending on your risk tolerance). If someone is offering you something with a guaranteed rate of return, that should set off all your “scam” alarm bells.
The exception is annuities; some annuities offer a guaranteed rate, but they are usually sold by a broker. Annuities are most often used to help people manage their income in retirement. If you think an annuity might be a good option for you, check out this overview on annuities from the U.S. Securities and Exchange Commission (SEC).
Scrutinize the Bandwagon
When all of your friends and family are telling you about a “can’t lose” investment, don’t buy the hype. Feeling like everyone around you is getting in on an awesome investment opportunity can make it feel like you’re missing out, but this is actually a common sales pitch for scams.
Affinity fraud is when a scam targets members of a particular social circle, religious group, or ethnic background – so even if it seems like everyone around you is buying in to something, do your research and start with skepticism.
A Ponzi scheme is a type of investment fraud where they money you’re investing does not actually go toward a real company or investment. Instead, the money you “invest” is used to pay returns to earlier investors. Ponzi schemes at some point fail to attract a steady stream of new investors, and at this point, everyone except the earliest investors will lose their money.
Did you know that Ponzi schemes are named for a real person? Charles Ponzi scammed investors in the 1920s with what he claimed was postage stamp speculation. Again, the SEC is a great resource to learn about Ponzi scheme “red flags” – these include being offered unusually high returns with very low risk.
Get an Account Statement
Your investment account statements are easy to skim and throw away, but it’s worth taking a closer look to make sure you’re clear about the details of your investments. Sometimes you can judge a book by its cover: if your account statement looks unprofessional or altered, this is a good tip that it may be fraudulent.
Make sure your account statement has all these key pieces of information and don’t be afraid to ask questions if you feel like something might be off.
Check the Source
If you’re ever suspicious or uncertain, trust your gut and do some research. Here are a few good places to start:
- BrokerCheck from FINRA: Use this free online tool to research the background of financial brokers, advisers, and firms.
- Certified Financial Planner: CFPs are professionals trained in financial planning who can serve as trustworthy resources in your financial life.
- The Consumer Financial Protection Bureau (CFPB): The CFPB is a U.S. government agency that works to make sure that banks, lenders, and other financial companies treat consumers fairly.
All investments have some inherent risk (that’s the downside of putting money into the market). But if you stick to an investment strategy, create a diversified portfolio, and keep a keen eye out for scams, you can minimize your risk and maximize your reward.