3 Ways to Avoid Investment Scams

June 11, 2014

in Investing

By Alvin Chow (guest contributor)

Sunshine Empire. Profitable Plots. Assetton Fine Wine. Geneva Gold. The Gold Guarantee. The list of scams goes on and on. Scams always exist. They are able to because of human beings’ inherent greed and ignorance. We fantasize about earning a quick buck without doing anything rather than putting time and effort to work for an income.

Truly, we are drowning in information – true and false information alike. What we need is knowledge to discern the difference. Below are three ways to gain that wisdom and avoid investment scams.

1. Seek financial awareness and not more regulation

As we encourage people to start businesses, there are bound to be unscrupulous businessmen.  However, the solution is not more government regulation. We want an environment that fosters entrepreneurship instead of being stifled by excessive regulation. Moreover, scams come in many forms, creating the latest fad or story that people can easily believe, so it is impossible to regulate everything in this world. The immense number of gold scams initiated in recent years is a good example. When facing one of the longest gold Bull Runs, it is easier to persuade – and deceive – people to invest in gold.

Regulation is tough. The only way to protect Singaporeans against scams is to increase their financial awareness. Equip them with the knowledge to discern the soundness of an investment. For example, gold is a negative yielding asset (means you pay to store gold). So, do not trust a scammer trying to tell you that gold pays out a monthly interest.

2. Check the MAS Investors’ Alert List

The Monetary Authority of Singapore (MAS) publishes a list of suspicious businesses online. You should always check if the company you hear about is on this list. Do not be too happy if it is not on the list because it may still be an officially unidentified scam.

So how do you know when to trust? Use the next tip to help you.

3. Learn to identify the characteristics of a scam

Although the assets scammers sell are different, their marketing approach remains largely the same. This is good news as we are in better positions to identify the characteristics of a typical scam.

A typical scam usually has:

  • Multi-level marketing or pyramid structure. You pay an enrollment fee or purchase a product to become a member. Subsequently, you can earn more money by recruiting more paying members.
  • Success stories. The company may show you many success stories of how their members have made a lot of money within a short span of time. Suddenly, you feel like your millionaire dream is within reach.
  • Promises of high return. To me, anything that is above an equity index fund annual return of eight percent is suspicious. It is very difficult to generate long term equity-like returns, especially for new start-ups.
  • No clear information on how the business makes money and pays you that kind of returns. Ask yourself: how much commission is the sales guy getting after selling the asset to you? How about all the middlemen who need to be paid? Do you think the deal can generate so much profit to pay you such high returns?
  • If it is too good to be true, it is too good to be true. Ask yourself why rich people would not get to these good deals before the retail investors?

I hope these tips can help shield you against future scams. Like I said, it is not regulation that saves you from scams, it is financial awareness. I have done my part by offering you knowledge. Now, it is your turn to put them to good use.

By guest contributor Alvin Chow, who blogs at Big Fat Purse, a Singapore personal finance blog.

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