Are the investments being offered to you a little too good to be true? We look at some past examples where people have lost capital through fraudsters and failed schemes, and reveal some red flags you should look out for.
We’re all familiar with the saying, “If the investment is too good to be true, it probably is”, and there is a good reason for that. There is no shortage of individuals, even companies, that will try to sell you an investment under the false promise of large, guaranteed returns – often within a short period of time.
It’s happened before – it will happen again
You may remember the notorious Barlow Clowes case, where around 15,000 people, many of them retirees, were invested in the fund which was wound up by the high court in 1988 owing £190 million. The fund claimed to be invested in low-risk government gilts but promised returns higher than gilts were paying.
Equitable Life carries another cautionary tale. This was a reputable company which came unstuck after offering customers higher than average rates – a move that allowed 800,000 policy holders to be caught out when inflation and interest rates dropped, leaving the mutual insurance society struggling to fund its commitments.
In 2009, there was the well-documented fraud of Bernard Madoff – a ‘Ponzi’ scheme where money from new clients was used to pay older ones. Bernard lured investors through promises of between 10 and 12% annual returns on investment – by the time the US government caught up with him, he had cheated clients out of $65 billion.
These are just a few examples. As long as there are markets, there will be those trying to get rich by selling hope to the less informed. Those taken in by these schemes were intelligent people – victims often of misleading claims by an individual or company they believed they could trust.
Renowned English cleric, author and art collector Charles Caleb Colton once said, “There are some frauds so well conducted that it would be stupidity not to be deceived by them”.
A statement that describes the cunning, charm and resourcefulness of fraudsters, and the vigilance and discernment we must maintain whenever we are asked to invest our money.
The risk of crypto investment
It is important to note that anybody can create a cryptocurrency, and it is quite rare for one to present any real-world use. The cryptocurrency space is highly volatile, where market prices have been known to rise and fall drastically within hours, sometimes without any discernible influence.
If you are determined to invest some of your funds in cryptocurrency, however, here are a few tips that might help ensure your money goes into a viable investment, and not toward a risky gamble.
- Founder involvement
Is the cryptocurrency well-established with its founder still heavily involved in the project? This is the first check you should make. It doesn’t bode well if the founder has already abandoned ship. (Note that some blockchains are maintained by a community rather than a founder – in these cases, check the strength and participation of the community and planned updates for the blockchain). - Use case
Does the cryptocurrency have a practical use case? Just like any good investment, your cryptocurrency should provide a solution to a modern economic or industry problem if you expect its value to increase. - Future relevance
Spending time in the markets is far more effective than an attempt at timing the markets. Do you believe in the future of the invested project, and will it be around for years to come?
Avoid investments that sound too good to be true
Be wary of promises that guarantee high returns. There aren’t any absolute guarantees with investment, and you’ll likely get a lower return the safer your money is. Compare the yields that have been promised with current returns on well-known stock indexes. If the numbers don’t match up, where could such returns possibly be coming from?
Be wary of anyone pressuring you with a sense of urgency. There is never a reason to act rapidly on an investment – and no reputable professional would push you to make an immediate decision.
To protect the financial security you have built for you and your family, consult the advice of an expert that is regulated by a reputable authority before committing to any investment being sold to you – and focus on the fundamentals. You have probably worked hard over decades to build your wealth for you and your family – if something seems too good to be true, don’t put that wealth at undue risk.
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).
www.blevinsfranks.com
