How to Avoid Ponzi Schemes
The unscrupulous masterminds of Pyramid and Ponzi schemes lose investors hundreds of thousands, by promising too good to be true returns on investments.
You can spot a Ponzi scheme by looking at the returns earned and the investment growth promised. If the scheme offers you a yearly return of 20% above the repo rate, you are dealing with a Ponzi scheme, according to the Consumer Protection Act. Right now, a return of 27% or higher spells trouble.
What are Ponzi Schemes?
Ponzi schemes generate returns for old investors via the recruitment of new investors. These schemes inevitably collapse, as earlier investors only make money if fresh investors are continually recruited, which is unsustainable. Whereas, new investors may never get their money back, never mind seeing any returns on their investment.
Here is how to avoid getting sucked into a Ponzi scheme.
If anyone attempts to sell you a low risk investment with high returns, alarm bells should go off in your head. Be particularly cautious of any investment scheme that promises a big payout in a short period of time – it could be a Ponzi schemer or just your common criminal.
Don’t be Gullible
If it sounds too good to be true, it probably is! Truer words have never spoken. Don’t allow yourself to have wool pulled over your eyes by sweet-talking con artists with the gift of the gab. A stranger or ad persuading you to dig deep into your pockets to invest in some unbelievable scheme is just plain fishy and not to be trusted.
Do Your Research
These days, no-one spends money until they’ve researched the seller and what they’re buying online. The same goes for opening up a bank account, booking a hotel room, going to a restaurant and so the list goes on.
Naturally, the same should apply for any scheme you are looking to invest in. Always check whether the scheme has the credentials of a sound investment. See if it’s registered under the Collective Investment Schemes Control Act. More importantly, check if the seller is a representative of a financial services provider registered with the Financial Services Board (FSB).
Check if it’s registered
Ponzi schemes are often unregistered investments. The South African Police Service’s Specialised Commercial Crimes Unit typically investigates Ponzi schemes, while news about the latest schemes can be found online.
Know how it works
Don’t invest in anything you don’t understand. Ask the seller the below questions, before forking out.
- How does it work?
- Is it sustainable?
- How much do I need to invest?
- What sort of returns can I expect?
If the seller cannot answer any of these questions or if their answers make no sense, this should serve as a red flag that the investment you are looking at may very well be a Ponzi scheme. When in doubt, always speak to a financial advisor first before investing.