By Essie Bester
When it comes to investment decisions, unrealistic expectations combined with desperation are very often responsible for big misery. Poor decisions taken without first asking the right questions and without questioning the legality of the product, can lead to financial ruin.
Potentially catastrophic, unregulated pyramid schemes – especially digital schemes – are flourishing, and this can be blamed squarely on the internet. The Bitcoin-based MMM Global Republic of Bitcoin, which collapsed recently, is an example of this. Schemes like these have been part of the global community since the early 1930s (at the time less sophisticated), when the American Charles Ponzi began swindling people out of their hard-earned money by means of pyramid schemes.
This type of schemes – Ponzi and pyramid schemes are very similar – rely on the contributions of new investors in order to pay current investors the promised return. The returns are usually totally unrealistic and much higher than the returns that can be earned on legal savings and investment products. The recruitment of new members assures the inflow of money.
According to Mike McDoughall, CEO of the Actuarial Society of South Africa, “it can be said with absolute certainty that these schemes will fold in the end, and this will depend on how fast the scheme grows and how much higher the declared return is than the real investment return on the money”.
The typical features of such a scheme include:
- You are invited to invite other people to join the scheme. This is the strongest clue that warns you to be careful and rather avoid it.
- Promises of unusually high returns in a very short time, together with a very terse explanation (if any) of how these returns will be generated, is another red flag!
- In some cases you may be asked to sell products or services to other people – people who in their turn must do the same. The big question you have to ask yourself is why the business owners do not sell their products in formal or informal shops but prefer that you do the distribution on their behalf.
McDoughall emphasises that investors must learn to read the warning signs when a company offers the impossible. Before blindly investing your hard-earned money or make an online donation in the hope of higher returns, McDoughall suggests that you ask yourself the following four questions:
- How are the returns generated? Legal investment schemes are transparent. You must understand the schemes underlying assets. Even if derivative structures are used, you should get enough information to help you understand your risks and potential returns.
- How aggressively are you being pushed to join? Legal investment schemes generate their returns on invested assets, while fraudulent schemes rely heavily on money from new members in order to pay existing members. You are therefore often pressured to join within a set period of time.
- How do the returns compare with those of other similar products? Be very careful if the returns are exceptionally high.
- How is the scheme regulated and audited? Regulators and auditors cannot guarantee a fraud-free environment, but the absence of a sound regulatory framework means that there is nobody to whom the scheme has to answer for its practices and returns.
If you are uncomfortable with any of the answers to the questions above, rather not become involved with the scheme.
Warning signs of telephonic marketing fraud (what you are told over the telephone):
You have won a free present, holiday or prize, but you must pay for the postage and handling, or other costs.
You must act now or otherwise the offer no longer stands.
You must send money, give a credit card or bank-account number, or courier a cheque. You may hear this before you have had an opportunity to properly evaluate the offer.
You are told that you may not miss this high-profit-no-risk offer.
McDoughall advice is simple: First do proper research and don’t believe everything a scheme’s marketers tell you. After all, it is your hard-earned money – handle it with care.
Waarom Ponzi’s en piramides altyd faal https://www.pressreader.com/south-africa/die-burger/20160604/281921657306483