If you’re like me, you like to think the world is a pretty honest place. Surely the days are gone where people will rob you blind, promise you the world then disappear into thin air… right? Well, sadly no. It seems like every two or three weeks I come across someone who has found a new investment option that promises amazing returns and they want me to have a look at it to work out if it’s legitimate or not.
Unfortunately people offering bad deals don’t dress like this guy, and for the most part they’ll make sure they look picture perfect. So with no bad disguises, how do you know if an investment opportunity is a good deal, or a horrible regret in the making? Here are some simple things to look out for:
1. Get rich quick promises
There are no shortcuts to wealth. None. At all. Ever. All wealth is made on a spectrum called risk and return. In simple terms it means that the more risk you take on, the higher your return will be, whether positive or negative. If you put all your money into a highly speculative mining explorer your return will be huge – either they’ll strike it rich, or go bust. If you put your money in a bank account, you’ll take on virtually no risk, and you’ll also earn a pittance in interest. Anyone who is promising you quick wealth is either doing something incredibly risky that has a high chance of ending in ruin or they’re flat lying.
2. Outrageous fixed returns
The ugly cousin of get rich quick scams are the outrageous fixed returns. They won’t necessarily promise instant wealth, but they’ll promise to generate a consistent return that is way outside of the normal range. For example, I recently saw a scam that was offering a fixed return of 4% per month. That’s 48% per annum, fixed, guaranteed money coming from a business that was allegedly purchasing undervalued companies and improving them. To give some perspective on that claim, no bank in Australia will guarantee you a return of more than 4% per annum for your cash. It’s one thing to generate a return of 48% in a year (a rare occurrence that does happen from time to time – see Blackmores during 2015), but to guarantee it and promise to deliver it over the long term is foolishness.
Any investment option that is open to the market at large (meaning anyone can buy it) that is averaging a return above 15% each year should be viewed cautiously. No one can escape the law of risk and return over the long run and if they’re genuinely delivering an average above 15% each year, it’s going to be a risky proposition.
3. Not based or registered in Australia
If you can’t get to their head office you might have a problem. Worse, if they aren’t registered and governed by Australian law, you might have a really big problem. I recently saw one such ‘investment opportunity’ that had its head office in a very small European nation where it was registered with their national authority.
4. Big referral bonuses
“If you join us and you get your mate to join, you’ll get 10% of his investment amount as a bonus, just for referring him to us.” Big referral bonuses are a strong indication to get far, far away. If an investment fund is giving away 10% of its money before it begins investing, how will it ever get in front? That investment must return 11% just to break even.
And the golden rule of investing:
If it looks to good to be true, it usually is.