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10 Ways to Reduce the Chances of Being Victimized by Investment Fraud

Investment fraud can cost hundreds, thousands, millions, or billions of dollars. It can wipe out your retirement account. Here’s how to avoid getting hit by it.

By Iggy PaulsenPublished 6 years ago 5 min read

When Bernie Madoff, one of the founders of NASDAQ, was caught defrauding high net worth investors of over $60 billion, the world went into shock. It was the most prolific case of investment fraud ever seen, and it had wiped out the bank accounts of thousands of people across the nation.

Most people who aren’t into Wall Street drama tend to assume that Madoff’s wild Ponzi scheme was a one-off event. Unfortunately, this is just not true. Fraudsters have been using the potential gain of a quality investment as a springboard for scams for years. In fact, this type of fraud is currently happening at an all time high rate.

It’s way easier than you think to be taken by a fraudulent investment opportunity. Here’s how experts suggest you can avoid being a victim.

Do due diligence.

The easiest way to avoid being victimized by investment fraud is to really, truly research the companies that you want to invest in. How do they get their income? What do they do? Who’s the CEO, and how has their past performance been? If it’s an ETF, you should research each company that is part of that fund—or at least, most of them.

If you’re doing an alternative investment, take a look at the white papers or third-party valuations. If anything seems unusually vague, ask questions, and don’t accept, “It’s really complex,” as a reason.

Don’t undervalue the importance of due diligence and asking questions. It’s worth pointing out that Bernie Madoff used a real strategy, and then kept things very vague about his “fund.”

Stick to stocks, bonds, index funds, and ETFs.

Generally speaking, the more heavily regulated an investment is, the less likely it is to be a sham. This means that having publicly-traded investments is often the best way to go.

Though there are still investments that end up being fraudulent in either reporting or in existence, they are far fewer in number than private investment circuits. That's the perk of investing in classic things.

It’s worth pointing out that you still need to do your own homework. Otherwise, you will end up finding at least one or two bad eggs amongst your portfolio.

Sure, stocks aren't glamorous, but many stocks offer shareholder perks that would make you rethink how cool they are.

Use common sense when trying private investments.

If you are going to try to be a private investor in businesses, then you really should rely on common sense. If something seems like it’s too good to be true, it probably is. If you are being asked to invest in a device or business and see no proof of it, you’re probably talking to a scammer.

Simply put, it’s important to let your head rule your investments—not your greed.

Avoid ICOs if you want to stay wealthy.

Though there are plenty of people who invested in crypto and were successful, the truth is that it’s a pit of vipers. Studies show that around 80 percent of all Initial Coin Offerings were actually textbook cases of investment fraud. More specifically, they were cases where creators “exit scammed” once enough money was taken.

The sheer number of scams is so high, the SEC actually created a fake ICO just to warn about the investment scams attached to them. Some experts say you really shouldn't invest in crypto at all!

If you’re new to investing or just don’t have time for super in-depth due diligence, the sheer amount of work you would have to do in order to invest in an ICO safely makes them really not worth it.

Your financial advisor will push you towards a lot of investments, but do they really have your best interest in mind? If you aren’t really careful about who you hire, it could easily cause you to lose money based on fees, bad investments, or otherwise faulty products.

Find out your advisor’s credentials, and what others have to say about him. You might be surprised at how much you can gain from a little research.

Avoid any sort of investment that guarantees returns.

The biggest, most glaring sign of investment fraud is the promise of guaranteed returns. There is no kind of investment, minus US-held government bonds, that will ever guarantee you a return. Everything is risky, and if someone tells you otherwise, they’re taking you for a fool.

Think about it. If it was a guaranteed return, wouldn’t everyone be doing it? Moreover, why would a person need to sell you on it?

The person in charge of the investment has no certifications, no experience, and no education in the field.

One of the red flags you should watch for when doing due diligence is a lack of qualifications for people in charge of your investments. On Wall Street, your experience and education are everything. If you don’t have those, you probably aren’t legitimate.

For example, if you’re considering investing in a hedge fund, you want to have a hedge fund manager who has a prestigious education, a couple of years of experience, and tons of connections. You don’t want a guy who is a high school dropout.

Reject high pressure sales tactics on principle alone.

Investing is always optional—always. It’s also something that should be taken with a skeptical attitude and a very slow gait. Any time you hear someone giving you a high-pressure sales technique, you need to shut it down.

More often than not, the person who is using that technique is looking to get rich off your naiveté. Though it may not always be via investment fraud, it’s concerning enough that you shouldn’t take the risks regardless.

Any time you hear the phrase “insider knowledge,” you should get worried. More often than not, the person is trying to make you feel special or make you feel like you’re part of the “in and rich” club. At first, this might sound fine, but in truth, it’s not okay.

The claim of having a secret gathering or having a special cabal of people in a specific investment circuit is one that typically precedes a major scam. If you know investing laws, then you also are aware that this could be a sign of insider trading—and that’s something you don’t want to be implicated in!

Finally, look for verification and certification.

Though many people on Wall Street might hate them, the SEC is there for a reason. The SEC was developed to help investors get better ways to do their due diligence and find reliable professionals in the finance sector. This board’s entire job is to prevent investment fraud from happening!

Don’t invest with companies or people that aren’t approved by the boards that are there to protect you. You should seek out certification, SEC registration, and verifiable details before plunking down cash on anything.


About the Creator

Iggy Paulsen

Iggy Paulsen is a fan of anything and everything wholesome. He loves his two dogs, hiking in the woods, traveling to Aruba, building DIY projects that better humanity, and listening to motivational speakers. He hopes to eventually become a motivational speaker himself.

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    Iggy PaulsenWritten by Iggy Paulsen

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