What red flags should I look out for in a Ponzi scheme?


Hindsight bias can make investors regret not positioning their portfolio in a particular way ahead of a major market event. FILE PHOTO | SHUTTERSTOCK 

What you need to know:

I want to start investing. How can I spot a Ponzi scheme and other scams?


Investing can be a great way to grow your wealth over time, but it is essential to be aware of fraudulent schemes that can harm your financial health. Unfortunately, many scams out here are designed to trick people into investing their money, often promising high returns with little to no risk. 

To avoid being caught in a scam, it is crucial to do your due diligence and thoroughly research any investment opportunity before putting your money into it.

Here are some tips to help you spot a Ponzi scheme and other investment scams:

High returns with little risk

Scammers often promise high returns with little to no risk, which is not a realistic or sustainable business model. If an investment opportunity seems too good to be true, it probably is. This is a red flag that you should be aware of.

Unregistered investment: Legitimate investment opportunities are often registered with the appropriate government agencies. You can check with the registrar to verify the legitimacy. If the company is not registered, licensed to receive money from Kenyans, and regulated, it may be a scam.

Pressure to invest quickly

Scammers often use urgency and scare tactics to convince you to invest your money quickly. This can be by giving you examples of people who joined recently and have already doubled or tripled their investment or this is the only time when the returns are high, and it is likely to take a dip within a few weeks or months. It may be a scam if you feel pressured to invest before thoroughly researching the opportunity.

No product

This is one red flag of a potential investment scam. If the investment opportunity being offered doesn't have a clear and tangible product or service, this may be a sign that the scheme is not legitimate.

In most cases, you are told you will make money by simply onboarding your friends and family. Before investing, be sure you have full knowledge of what they're selling and make sure you understand what you're buying into.

Lack of transparency

A legitimate investment should provide clear information about the investment opportunity, including details on the business model, revenue streams, and potential risks.

Ponzi schemes often hide information or make it difficult for you to understand the details of how they're making money. Be wary of investments that lack clear and concise information. 

Complex or unfamiliar investment strategies

 Scammers often use complex or unfamiliar investment strategies to make the investment opportunity seem legitimate. If you don't understand how the investment works, it's best to avoid it.

This can include the use of jargon, unfamiliar financial products, or misleading information. Legitimate investment vehicles are well known and universally applied, educate yourself on them so a statement like "This new model is already making people millionaires across the world" should not be a reason to risk your hard-earned money.

Unverifiable investment returns

Scammers often provide unverifiable information or documentation to support their claims. This may be exaggerated high returns with no evidence to support it. Be wary of investments with unverifiable documentation.

This could include false testimonials, fake news articles, or fabricated reports. They can go as far as hiring bloggers to post misleading information on their websites.

If you must invest, only invest money that you can afford to lose, this way, you'll be better prepared for any potential financial losses and can avoid putting yourself into a difficult financial situation. It is also a good idea to diversify your investments and not put all your eggs in one basket.

This can help mitigate risk and ensure that your overall investment portfolio is well-rounded. In case of a loss within one investment, another which is profitable can offset the losses.

The cardinal rule is to, NEVER borrow money to invest in a scheme you are not sure about. 

Before investing, consult with a financial advisor and review the investment details thoroughly, including the business model, revenue streams, and potential risks. Investing wisely and safely can help ensure a bright financial future.

Ms Owuor is a financial trainer and consultant on retirement solutions;  [email protected]

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