The
lure of a quick buck is all around us, and may
seem
quite irresistible -- especially now.
With money
tight
and investment returns headed nowhere (if not
down),
that alluring offer guaranteed to make you a
millionaire
can paint a very pretty picture indeed.
However,
in most cases, these pictures need some
serious
reviewing, and investors should be extremely
wary.
In
some cases, the pitches are simply gross
exaggerations. Money can indeed be made -- but it's
not
as easy, or as quick, as promoters make it sound.
Other
deals are nothing but scams, underwritten by con
artists
intent on using your money to underwrite their
retirement.
An
appeal to greed
So,
how do you spot -- and avoid -- these
dangerous
pitches? Here are some of the warning
flags:
1. Promised investment returns that are
substantially
higher than average. Every percentage
point
increase above the going Treasury bond rate
should
be considered an increase in risk. When
an
offer
promises risk-free returns to 10 percent above
the
Treasury rate, you shouldn't only be seeing flags,
you
should be hearing sirens.
2. "Now-or-never" sales pitches, or
"limited-time
offers." Promoters give you this special opportunity
now,
but can't guarantee they'll be able to "hold your
spot"
-- even for an hour. Why? If you think about it
too
long, you might come to your senses, so they want
your
check or credit card number now.
3. Solicitations (usually phone pitches) from
unlicensed
companies. Before handing over your
money,
you
should know a lot about the company you're
investing
with. Check it out with a federal or
state
agency
that registers or licenses businesses, like the
Department
of Corporations, the Department of
Insurance,
the Secretary of State or the Securities
Commission.
If
you can't find the company through inquiries
there,
how easily do you think you'll find your money
once
it's gone
4. Offshore companies. Unfortunately, the many
legitimate
advantages offered through investing with
offshore
banks or corporations have sometimes been
over-promoted
by unscrupulous con artists, all too
ready
to relieve you of your assets and then hide
behind
the same blanket of financial privacy you wanted
to
enjoy for yourself.
You
should thoroughly investigate any agency or
organization
offering assistance with offshore
investments.
Deal
only with long-established firms of proven
reputation,
and request references before entrusting
your
hard-earned money to anyone who claims to be an
"expert"
in the offshore investment field.
5. Beware the glib response. You know the adage,
"if
it sounds too good to be true, it probably is."
So
ask, "If this is such a sure-fire deal, why are
you
offering it to me? Why won't the banks
touch it?"
Con
artist response: "It's such a complex deal the
banks
don't understand." This is one of
the great lies
of
investing. Banks understand only too
well. It's
their
job. If they won't touch it, you
probably
shouldn't
either.
Some
precautions to take
Given
those dangers, here are some steps you can
take
to ensure you don't wind up the victim of a scam
artist:
1. Don't invest with someone who just calls over
the
phone. First ask yourself why the called
you, and
where
they got your name. Get a prospectus
first,
which
should provide a detailed analysis of the deal
and
its risks. Never send money or give out
a valid
credit
card number without it.
2. Check out the company and its officers. Know
who
you're investing with and what their history is in
the
business. Many scammers go from one con
to the
next
-- and they leave a legit trail behind them.
Check
your wheeler-dealer out with governmental
agencies
or the courts before handing over your cash.
3. Don't let someone else do your reading for
you. You wouldn't walk blindfolded into a car
dealership
and say, "Give me a good one for $20,000,"
so
don't do it with your investments. Don't
rely on a
friend
to fill you in. Do the reading yourself --
and
talk
to your accountant, financial planner, attorney or
other
adviser before taking the plunge.
As
long as there are investments, there will be
investment
scams. However, with a little common
sense
and
a few precautions,you should be able to avoid
becoming
the victim of one.
The
Treasury Bond Scam
Just
when you think that every gimmick to separate
you
from your money has been exposed, a slew of new
ones
appears. The sad truth about gimmicks is
that
those
who can least afford to lose money are the ones
who
get hurt the most. Gimmicks come in many
forms.
What
we're talking about is blatant, shameless deceit
that's
put forth under the guise of protecting you.
Each
one has a different song and dance. Many
of them
are
obvious if you follow the rule of "if it sounds too
good
to be true, it probably is."
But
some of them are so good that they can sneak
by
even a relatively sophisticated investor -- and this
one
is so dangerous that it can take most of your life
savings
before you know it's gone. And the
realization
comes
so many years later, that it's too late to act --
if
the realization comes at all. This one
is so good
that
you can believe you lost your investment due to
"natural"
causes.
The
scam that calls for such strong words is the
guaranteed
account scam. This scam is one of the
most
effective
tricks in the book, because it "guarantees"
that
you won't lose a cent. The broker calls
you up
and
makes a pitch about a great investment idea that
guarantees
you won't lose a dime in principal.
That's
a
guarantee that many people -- including many
reasonably
sophisticated investors -- will jump on.
It's
true, you will not lose any of your principal --
but
you may lose thousands in purchasing power.
The
scam involves U.S. Treasury zero-coupon bonds,
which
are guaranteed by the government. These
bonds
are
long-term and issued at a discount from face value.
Their
interest each period is simply the difference in
the
market value at the beginning and end of the
period. For example, a zero-coupon bond may sell
today
at
$600 and after its maturity in five years you will
receive
the face value, or $1,000. In the
meantime you
will
not receive any interest payments.
However, you
must
pay an "imputed tax" on the earnings every year,
meaning
even though you're not receiving interest, you
pay
tax on what you would receive. Then at
maturity
when
you collect, you pay no tax.
The
broker will ask for, say $100,000, and promise
that
if you invest it with him for 10 years, the worst
you'll
do is get all of it back. No mention is
made of
inflation. No mention is made of lost interest, or the
effects
of compounding that interest for ten years.
What
the broker intends to do is buy zero-coupon bonds
that
mature in 10 years and that will then equal
$100,000. (In other words, if he invests only $60,000
of
your $100,000 in zero-coupon bonds that are yielding
6%,
he will have $100,000 in 10 years.) The
rest of
your
money is as good as in his pocket. That
remaining
$40,000
will be churned in and out of investments, some
making
money, some losing money, but each buy or sell
being
a guaranteed commission for him. And at
the end
of
10 years, you are guaranteed to get your principal
back
($100,000) -- which at just 4% inflation will only
be
worth about $67,000 by then.
If
you're offered any type of guaranteed return
that
sounds too good to be true, it is in your best
interest
to pass it up, but the real danger with this
one
is that it doesn't really sound too good to be
true. It sounds very conservative, backed by
Treasury
bonds,
offered by apparently reputable brokers who have
been
in business for decades -- not at all like the
normal
get rich quick scheme that would have you
hanging
up the phone. There are some mutual
funds
offering
this same deal today, and as it works,
variations
on the scam will probably turn up in other
deals.
Caveat
emptor.
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