Confidence is good. It helps us get up in the morning. We can confidently expect the sun to rise and roosters to crow. But when it comes to investing, confidence is your enemy. It leads us to do stupid things. It encourages folks to invest with their hearts and not their heads. And that encourages crooks to try to scam your money.
It’s not just Nigerian wire-transfer or bogus “letter-of-credit” scams. It can be private company transactions, penny-stock offers, and even seemingly guaranteed annuities—an otherwise legitimate investment that can be trussed-up with lockouts, penalties, and mind-blowing commissions for the salesperson.
All investments have risk. Ask what can go wrong, how badly, and how soon. Legitimate investment offers have a significant section devoted to risk factors. While you’re there, ask to see the legal documents so you can run them by your lawyer. (Note: you don’t really need a lawyer to ask this.) Additionally, complexity is your enemy. The more convoluted the structure, the less likely any return will find its way back to you. If they can’t explain the investment on the back of a napkin in crayon, it’s probably too complicated. Finally, ask how the salesperson is getting paid. Legitimate businesses have reasonable fees and margins. Don’t be afraid to ask what these are and how much of your investment will end up in the broker’s bank account.
If you don’t get satisfactory answers, hang up. Remember: if it sounds too good to be true, it probably is. And the only thing certain about money is that someone wants it.
Douglas R. Tengdin, CFA
Chief Investment Officer
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