Huffpost Money
THE BLOG

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Ike Ikokwu Headshot

8 Tips to Avoid Investing in a Ponzi Scheme

Posted: Updated:
Print

One of my core financial planning beliefs is that I can drastically improve your financial position by helping you avoid the losses than by focusing on picking winning stocks. After having lost hundreds of thousands of dollars chasing returns in Bernie Madoff type scams, I am one of the most apprehensive investors out there. In response to the $600 million ponzi scheme run by an old multilevel marketing hack named Paul Burks, Foxbusiness.com raises the question: "How Can One Million People Be This Dumb?" Well, whether it's one million or ten million, people will still fall prey to these schemes until they pay attention to some basic rules of thumb to help you avoid them.

Whether it's the allure of being a part of something exclusive or simply making a lot of money, people will seek out opportunities for financial gain. So in your many and varied attempts to increase your financial standing in life, I'd like to point out some things you should look for to avoid becoming the victim of yet another ponzi scheme. Here are 8 tips:

• Never invest in anything you don't understand. You don't have to know the intricacies of how the investment works but you should understand the "big picture" of what's going on and be able to communicate that to whomever asks you what you are investing in.

• If the only way you can participate in the investment is by being "referred in" by another client, chances are that's not a good sign. It's one thing for my clients to participate in private placements where the opportunity to participate is limited. However, that is quite a bit different than a statement that says, "the only way you can find out about this investment is by another client telling you about it."

• If the company offering the investment doesn't have a website, isn't listed with the Better Business Bureau or isn't otherwise registered with an appropriate governing body...whether that's the SEC or some other organization, that's probably a red flag.

• If they tell you the only way and emphasis here is on "the only way" you can participate in the investment is doing so through a Limited Liability Company, that could be a red flag.

• If the company you are to invest with pools their money in with their general account, signs a personal or corporate guarantee to you that if your funds are "lost" while trading they will pay you back and guarantees you a fixed return when otherwise investing in an inherently risky investment like commodities, futures or currency trading, that is most likely a red flag.

• If the company you are to invest with has you open up an account with a broker and the trading agreement says that there are no "other agreements" with you and the company that will be trading your account for you, but yet that company has signed a personal or corporate guarantee saying that if your funds are lost from trading, they will pay you back and guarantees you a fixed return when otherwise investing in an inherently risky investment like commodities, futures or currency trading, this is most likely a red flag.

• If the company you are going to invest with says they can consistently earn double digit monthly returns trading, but are at the same time actively trying to raise money from an investor like yourself, ask yourself this question: If you could consistently earn double digit monthly returns on your money and you had a $100,000 to invest, is there any reason why you would need anyone else's money to trade? 10% a month on $100,000 would create $120,000 in yearly income which would put you in the top 10% of income earners in the United States.

• Lastly, if it sounds too good to be true, then chances are it probably is.

With all of that being said, I will tell you that it is possible to earn double digit returns annually without investing in a ponzi scheme.

To learn about some of the legitimate ways that I and my clients have been able to consistently do this, may I suggest that you pick up a copy of my book.

Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.