Now that more people are looking into ways to earn extra income or generate a residual income from investments and other income opportunities, Ponzi schemes have become more common. But as con artists have become savvier, so have the Ponzi schemes they create. To ensure you don’t lose your hard-earned money to a Ponzi scheme, we detail how to identify a Ponzi scheme.
What is a Ponzi Scheme?
A Ponzi scheme is a type of fraud that pays older investors with the money gained from newer investors. Usually, when the scheme cannot lure new investors, it becomes clear that it was a Ponzi scheme. Unfortunately for many investors at that point, it may be too late.
10 Red Flags to Identify a Ponzi Scheme
Although Ponzi schemes have become more sophisticated, most schemes still have the same warning signs that reveal to would-be investors it’s a fraud. To help you determine if the opportunity you want to invest in is a Ponzi scheme, below are ten of the most common red flags.
Unusually High Return Rates
One way to quickly identify a Ponzi scheme is by investigating the return rate. Conventional investments have a minimal return. However, to entice investors, Ponzi scheme operators always promote their above market-average returns.
Some of these schemes may even go as far as to promote daily or weekly payouts.
So, if you are suspicious about whether an opportunity is a Ponzi Scheme, review the return rate. Anything above 15% annually is dubious and requires further research.
Returns That Are ‘Guaranteed’
Many legitimate investment instruments avoid “guaranteeing” any return rate to avoid being liable for any potential market fluctuation. The only exceptions are low-risk opportunities. But, to trigger your desire for security, many Ponzi schemes will market the investment as having “guaranteed returns.”
In this instance, remember that if something is too good to be true, it is.
Performance That Consistently Out-performs The Market
If you’re hearing from friends, family, or on a WhatsApp or Facebook group that some investment opportunity is consistently out-performing the market, that in itself is a red flag.
Because most investments are exposed to the market, the portfolio’s performance will fluctuate.
If your return is paid out like clockwork, without any hesitation or fluctuation, it’s a Ponzi scheme.
Pressure to Reinvest
A Ponzi scheme works like a pyramid. Operators take money from new investors to pay the returns promised to existing investors. Since the money is essentially recycled and there isn’t any product, the scheme’s operators need you to reinvest any dividends to keep the fraud going and maintain the – lavish – lifestyles of the scheme’s operators.
Marketed as a No-Risk Opportunity
Investing is much like gambling: there aren’t any guarantees. However, to overcome any hesitancy of potential investors regarding the investment opportunity, Ponzi schemes are marketed as risk-free. Once again, because most investments – whether in real estate, the stock exchange, or cryptocurrency – fluctuate, there’s a possibility that you could lose money.
Targeting Their Inner Circle
Although it may seem contradictory, Ponzi schemes are built on trust. Most seasoned investors are sceptical of any opportunity that seems too good to be true. So, to work around those fears, Ponzi operators go to great lengths to ingratiate themselves in the lives of those they’re trying to dupe. This means before they market the once-in-a-lifetime opportunity to you, the operator first wants to ensure you feel you can trust them. Once they establish that trust, taking your money becomes easier.
A Focus on Getting New Investors
As mentioned before, Ponzi schemes need new investors to pay old investors, which means there will always be an emphasis on getting new investors. So, if you are encouraged to bring new people on board, you are in the grips of a Ponzi scheme. Remember, any legitimate investment opportunity does not need to advertise or market to new investors to sustain profits.
Promises of Financial Security and Wealth
Although you may not want to admit it, the reason Ponzi schemes thrive in this era is that they feed into your desire for money, your inherent greed. To entice potential investors to part with their money, many of these operators will publicize the benefits of investing as financial security, wealth, or time freedom. Legitimate investments don’t exploit insecurity or desire to attract your investment. Instead, they focus on plainly showing you what you could get in return.
An Unclear Business Model
To help disguise the Ponzi scheme, owners and promoters are particularly vague – or unnecessarily overcomplicated – about what it entails. Veteran investor Warren Buffet has said that investors should invest in products they understand. While that may limit the number of investments you can participate in, it also ensures you won’t be hoodwinked by purposefully vague business models and investment structures.
Furthermore, if an operator cannot explain how they generate money or show evidence of where they invest your money, that is another red flag.
Urgency To Act
Most investment opportunities remain available to the public at all times. However, with many Ponzi schemes, there’s a false sense of urgency. The reason operators make it urgent is that it reduces the victims critical thinking. By making the opportunity urgent, investors do not have the time to consider their options carefully. Many investors may also suffer from decision fatigue, causing them to choose something they would not normally. That decision fatigue is only exacerbated by the fear of missing out (FOMO).
Since most Ponzi schemes aren’t regulated, if you find you have fallen victim to one, you don’t have an avenue for recourse. So, it’s important that wherever possible, you warn others, including the media, open a case of fraud against operators, or report it to a relevant investigative body.
Remember that a Ponzi scheme only succeeds because other victims have failed to sound the alarm, whether out of embarrassment or to avoid being shamed for being greedy. However, if you realize you have been scammed by a Ponzi scheme, overcome the temptation to recoup your losses by recruiting more victims. Instead, sound the alarm.
In future, also challenge yourself to overcome the innate desire for easy money or a secret for financial stability and wealth.