5 Tactics to Avoid Being Fooled By Investment Scams
Self-directed IRA holders invest their retirement plan assets in investments that go beyond your traditional CDs, money market accounts, mutual funds, and stocks and bonds. With the possibility of receiving greater rewards comes greater risk of engaging with investment scams.
Here are some tips provided by the Securities and Exchange Commission that may help an investor in conducting proper due diligence before investing.
- Research everything no matter how much you trust your confidant.
Never make an investment based solely on the recommendation of a member of an organization, or religious or ethnic group to which you belong. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
- Do not fall for investments that promise spectacular profits or "guaranteed" returns.
If an investment seems too good to be true, then it probably is. Similarly, be extremely leery of any investment that is said to have no risks; very few investments are risk-free. The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.
- Be skeptical of any investment opportunity that is not in writing.
Fraudsters often avoid putting things in writing, but legitimate investments are usually in writing. Avoid an investment if you are told they “do not have the time to reduce to writing" the details about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential.
- Don't be pressured or rushed into buying an investment before you have a chance to think about—or investigate—the "opportunity."
Just because someone you know made money, or claims to have made money, doesn't mean you will too. Be especially skeptical of investments that are pitched as "once-in-a-lifetime" opportunities, particularly when the promoter bases the recommendation on "inside" or confidential information.
- Fraudsters increasingly use the Internet to target potential investors through e-mail spams.
If you receive an unsolicited e-mail from someone you don't know, especially if it contains a "can't miss" investment, your best move is to pass up the "opportunity" and forward the spam to the SEC at firstname.lastname@example.org.
This list is not all inclusive—it seems that fraudsters get more clever all the time—but it’s a good place for investors to start learning what to watch out for when doing due diligence. If you’re interested in protecting yourself further, read this comprehensive report: What Due Diligence Is, Why It Matters, and How To Do It Well.