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Top Tips to Easily Spot and Avoid Investment Scams

by All Sussed Team

As a generally positive person, I like to think that most people I meet are decent and honest and I hope that statistics would support that belief.

However, to think that EVERYBODY you meet is good and honest would be very naïve, especially when money is involved. There are some people out there that are just thieving b*stards.

So when it comes to investing your hard-earned dough, you need to be vigilant.

Many investments are not scams, per se, but are simply poor or expensive products that are either mis-sold or inappropriately recommended by financial product salespeople who are motivated by commissions, rather than by doing what is right for the client.

This is the subject of a whole other post that I may write one day.

But here, I am taking about the out-and-out criminal scams, designed purely to steal your money. I know you might be thinking it, but I am not referring to the tax bureau.

(Big shout out to the good, hard-working people at tax bureaus all over the world. YAY!)

Some of these scams you will have probably heard of and some may well be new to you.

Either way, the point is to raise awareness. If I can help just one person recognise and avoid a scam in their path, writing this post has been worthwhile.

Types of investment scam

First off, there are more investment scams out there than you can probably imagine, but we’re hitting on half a dozen of them for you right here.

1. The Ponzi Scheme Scam

Charles Ponzi is the guy this one is named after and he orchestrated the first-known scheme of this type back in the early 20th Century.

You can read up on it here, but to break it down into a sentence, it is fraudulent investment that offers very high returns with low risk and generates returns for older investors with money acquired from new investors.

You could look at it like robbing Peter to pay Paul. These schemes invariably fall apart for one of three reasons:

  1. The guy running it does a runner – with all the money
  2. New investment slows down or dries up completely leaving nothing to pay out as returns
  3. Something unexpected happens in the stock markets or the economy that causes people to start wanting to pull their money out

In recent years, the biggest profile Ponzi scheme was the Bernie Madoff case, but you can find dozens of examples of smaller-scale cases if you research it.

2. Advance Fee Scam (a.k.a. 419, Nigerian Letter)

If you’ve never received one of these, I doubt you’ll be reading this post as you’re probably not even connected to the internet!

These come via email and Skype and Facebook all the time.

There are so many variations of this scam, but the crux of it involves communication from someone overseas offering of a share of a very large sum of money in return for a small, advance payment required for administration purposes in order to receive the share.

You can see some examples here.

Check out how James Veitch dealt with one of these on his very entertaining Ted Talk.

Although less common these days, similar scams can also occur over the phone. Check out this hilarious Fonejacker parodies compilation here.

3. The Pump and Dump Scam

Made famous by films like “Boiler Room” and “Wolf of Wall Street”, pump and dump schemes involve creating huge hype around a small company in a way that allows the promoters to off-load worthless shares at hugely inflated prices.

It is traditionally by cold-calling telesales teams using high-pressure tactics from their operational base – or the ‘boiler room’, a term which reflects the fact that the location or operation is a high-pressure sales environment.

These days, the first contact is just as likely to be initiated through email, SMS or social media.

4. The Prime Bank Scam

The “Prime bank” investment scam starts out with an offer to take part in an ‘exclusive’ investment programme. The schemes can be very elaborate and will usually claim to trade very complex ‘prime bank’ instruments that are normally only accessible to top international financiers, but (amazingly) being made available to you.

The big draw is the promise of returns of 100% or more. The promoters will often talk about secrecy in the sales pitches, which only adds to the allure and dissuades you from talking about it with anyone else and reducing the likelihood of you being talked out of it. Everyone likes the idea of exclusive access to high-return investments unknown to the general public, right?

The thing is, prime bank investments don’t even exist.

5. The Newsletter Scam

If you subscribe to any stock picking website, you’ll invariably find yourself subscribed to additional newsletters written by ‘experts’ offering exclusive insights into the markets and ‘once-in-a-lifetime’ recommendations for the next stock that’s about to explode.

Sign up to these with caution, because your inbox is going to get pelted with this crap.

Now, there are some great newsletters, but unfortunately, a lot of them are just creating hype around stocks as part of the pump and dump scheme (see above).

They usually provide a lot of credible sounding research and go heavy on the limited-time-to-act routine, so if you get one, don’t start dreaming about the ‘what-ifs’. Just delete the sucker and move on wth your day.

These people don’t know sh*t and even if they did, why would they be sharing it with you?

Examples here, courtesy of Investopedia.

6. The Alternative Investment Scam

We’re talking rubber plantations, storage containers, fine wine, car parking spaces and pretty much anything else you can think of. These are particularly prevalent in the offshore financial services sector, where regulation is a lot more lax, so if you’re an expat, watch out for this kind of thing.

The common selling point used for these is to “diversify your risk with assets that are different to those in the stock market.”

Whilst this reasoning has some merit, the problem is, it is unlikely that the broker recommending them has done the necessary due diligence, so you never know what you’re really getting.

Some of these investments may well be legitimate, but most are not and the fact they pay the brokers selling them such huge commissions is a red flag.


How To Avoid Investment Scams

Anyone can be caught off-guard with these scams, even people who know a bit about investing. Reduce your risk of being one of those that get caught out by following our Top Five Tips below.

Tip #1: Don’t Believe The Hype

Something nearly all scams have in common is the lure of high returns. The chance of making some easy money is too tempting for some people, but never, EVER forget the old adage: If it sounds too good to be true, it probably is.

When people are asking for your money, you need to be skeptical.

Tip #2: Phone A Friend

Get a second opinion. Don’t keep it to yourself, especially if you’ve been told secrecy is required. 

Sanity-check yourself with friends and family and a trusted financial advisor. If it’s your financial advisor recommending it, get the opinion of another one.

Tip #3: Do Some Digging

It may not always possible to get adequate and accurate information about the investment being pitched to you, but before you hand over any money, you need to make damn sure you have spent time researching the company and the people behind it.

Get the information and apply Tip #2.

Tip #4: Understand It

Don’t invest in anything you don’t understand. I think it’s Warren Buffett that says this quite often and it seems like sound advice to me.

The rule is that if you can’t explain it to your mum or your children, it’s either too complicated or you don’t understand it well enough, so don’t do it, unless you’re gambling money you can afford to lose.

If you don’t get it, forget it – or regret it. Yo.

Tip #5: Don’t Feel Pressured

Just walk away from high pressure sales tactics

Simply put down the phone or walk away.

Anything that needs to be sold with urgency and by using high-pressure, emotional selling is rarely going to be a good purchase.


That’s Investment Scams all sussed.

Any questions or comments? Feel free to leave them below.

Related ~ Do These 7 Things To Improve Your Financial Situation Today

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