Beware of Investments Offering Oversized Returns

The Ripoff Alert is a new series appearing once each week on Fridays. It alerts you to the latest scams and ripoffs trying to get between you and your money, and gives you information you need to stay safe. This is #17 in the series. 

Trick question: What’s an easy way to guarantee a 10% return on your investments? Well, if I were a smooth criminal trying to make off with your money, I’d tell you I knew of a business that was about to make it to the big leagues. I’d convince you to “invest” your money before that happens. You’ll double or triple your money in just weeks! And with almost no risk!

Many of us are looking for that path to easy wealth. We badly want it to exist, and in some cases are willing to risk everything we’ve worked hard for to make a quick buck.

The truth about investing is that if you want a large return, you’re going to have to accept some level of risk. The larger the return you want, the larger the potential risk you have to take on. Anybody who tells you otherwise is trying to clean out your wallet.

The opposite is also true. If you’re unwilling to accept much risk, you have to settle with a lower return. Don’t be fooled into thinking you can have only upside with little or no potential downside.

“But I Need to Catch Up!”

Unless your time horizon is 10 years or longer, there’s no place you can put your money right now and have it grow more than about 1%. I know it’s pathetic. We all realize that won’t even beat inflation. But one nice side effect of these times we’re in is that if somebody comes along and tells you they can earn you 15% a year guaranteed, or 2% per day, or any other number that seems too good to be true, you know they’re lying. Such rates just don’t exist, today or ever.

I know it’s tempting to take the bait. You lost 30% of your nest egg in the recession and you need to get back on track. But the criminals will make off with your money, leaving you without the 15% return or your original investment.

Think about this: In an era where banks offer 1% per year on savings accounts, how can anybody legitimately offer 2% per day? Not gonna happen.

They’re Just So Sly

Fraudsters use online bulletin boards, newsletters and emails to alert you to these “can’t lose” deals. The internet allows them a curtain of anonymity that emboldens them to make audacious promises. But if this investment were such a great deal, why would they be telling us? Wouldn’t they just invest all of their own money if they truly believed it was a good deal?

You have to be careful with affinity fraud as well. This happens when someone you know and trust, such as a church leader or family member, tries to get money out of you for illegitimate purposes. It’s easy to let our guard down around those we trust. But when someone starts asking for your money you need to start asking questions.

So back to our trick question. The answer is there’s no way to guarantee a return of any percent on investments. By its very nature, investing is about taking on risk. It’s about taking chances. There are no guarantees with investing. 

One thought on “Beware of Investments Offering Oversized Returns

  1. Pingback: The Round Table – August 31, 2012 Edition — MoneySmartGuides.com

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