Ponzi Schemes: How Not To Fall Prey | srei

Ponzi Schemes: How Not To Fall Prey

There is nothing worse than losing all your hard earned money in search of some ‘investment opportunity’ that you are not entirely sure about. Ponzi schemes are a huge fraud built around the idea that you could get something for nothing. In this blog we are going to talk about recognizing such schemes that are too good to be true and seeing them for what they actually are.

What usually happens in a Ponzi scheme is that the financial advisor who you entrust with your life savings ends up spending all your money and the chance of recovering it is slim. There are three key ingredients that go into setting up such a scheme which prompts intelligent people to hand over their money. The first one is a convincing story. The Ponzi scheme is presented to the consumer as a ‘once in a lifetime’ opportunity that he shouldn’t let pass. In most Ponzi schemes around the world the financial advisor makes the investor believe that this is a scheme only he is aware about and has the expertise to exploit. The second key ingredient is that you have to be an incredibly good sales person. This not only means that you have to be a good talker but also be able to present the complete illusion of wealth, contacts and credibility. Credibility is actually the third key ingredient when it comes to these schemes and it is mainly established by the investors actually making money for the first few months. This is then followed by urging the investors to reinvest the money and trying to hook all their friends by spreading this story. As the pool of investors grows the fraudster has the money to keep up the illusion and pay off some of the previous investors.

Ponzi schemes can go on for a for quite some time but eventually they collapse either due to the investors pulling out their investments on the basis of various suspicions or regulators become aware of the fact that there is a scheme out there that is offering unrealistic returns. To understand why people fall for these schemes we could look at the psyche of a gambler which comes down to two things: greed and stupidity. Due to various credit crunches, the investors see this as an opportunity to get around the mainstream banks which have let them down but what ends up happening is the classic case of jumping from the frying pan into the fire. Even if the investor senses something wrong he thinks that he can get out before everyone else does but of course he never does.

So, how do we spot these schemes? The first thing to know is that there is no such thing as a free lunch. If someone offers you high investment returns for little or no risk chances of delivery is minimal. Overly consistent returns are another indicator. It is natural that the markets fluctuate but if your adviser manages to consistently get you incredible returns despite the scenario in the markets he is most likely lying to you. Dubious investments are the third indicator and this includes investments made overseas, investments you haven’t heard of or an unlicensed seller. Complex secretive strategies and arbitrage also is something you should watch out for. Suggestions that you cannot get your money back or any difficulty with paper work are ‘Ponzi’ signals.

In a Ponzi scheme after you have committed your money making redemptions is highly unlikely and that is why you should be very aware about all the points discussed. In current markets how and when you should pull your investments out is something you should be fairly good at in order to sustain and prevail with your hard earned money. To sum up we go back to a principal piece of advice which is that if an advisor in the market offers you something that is too good to be true it almost certainly is. So be aware about these daft investments and do not be greedy or unrealistic when it comes to investing.