There are several financial schemes out there to entice those in vulnerable situations. Here's how you can distinguish the quality opportunities from bogus schemes. There's no shame in being in a vulnerable financial position and in need of solid financial advice. But advice from friends, family, financial advisers and even strangers is not always helpful, correct or even well-intentioned. Before putting money into any scheme or trying a new savings strategy it is crucial that you give it careful consideration. With that in mind, let's look at some common pieces of bogus financial advice:
There's an ongoing start-up boom (some call it a 'bubble') with billions of investor dollars going into promising new ventures. It can be tempting to invest, especially after seeing year-old start-ups exiting for millions of dollars, earning investors handsome profits. However, before putting any money into a new business, you must understand that the most people who invest in start-ups professionally - i.e. venture capitalists and angel investors - often lose money on their investments. Despite leveraging extensive analysis and hedging their bets, the VC industry as a whole continues to under-perform. It isn't uncommon for a VC firm to lose money on 3 out of 4 investments. Be very wary of putting money into any new venture, howsoever promising. The VC community is filled with investors who put away millions of dollars into 'sure-shot' startups that ended up going bust.
How to Spot a Bogus Opportunity
Investing in a business is inherently risky. Be especially wary of investment opportunities that 'guarantee' profits. Also be wary of businesses in very 'buzzy' industries such as social media, new media, etc. The chances of a business going belly-up is significantly higher in such sectors than others (since the barrier to entry is minimal). Another factor to look out for is current stage of the company. Companies in "seed" stage with an unproven product have little guarantee of success, as opposed to a late-stage company with established revenues and user base. The pedigree of the founder(s) also matters, particularly in competitive sectors. Founders with a proven track record of success are likely to be better bets than new, untested founders.
Radical Debt Reduction Schemes
The typical debt reduction hustle comes in various forms. Sometimes, it is sold as debt resettlement, sometimes as debt reduction, and sometimes, as outright debt elimination. These scams are usually successful since they target desperate people burdened with debt. While some of these schemes, especially debt resettlement/reduction, may be successful, anything that promises complete elimination of outlying debt should be treated with suspicion. Put simply: barring a bankruptcy, nothing can make your debt go away. You can negotiate down outstanding debt but cannot eliminate it entirely.
How to Spot a Bogus Scheme
Follow the simple "if it sounds too good to be true, then it probably is" rule. Turn your back on any company or individual that promises to get rid of all your debt for an upfront fee. If you do go for debt resettlement, ensure that you check the bonafides of the company. If possible, ask to speak to previous clients (although this may be difficult given the confidential nature of debt-related transactions). Any legitimate company should have no problems furnishing you with details of its past track record.
New Investment Schemes
It is human nature to get lured into a new investment scheme that promises grand returns for very little effort. It isn't uncommon for even well-meaning, intelligent people to fall for such schemes, especially if it appears to be backed by a known authority (case in point: the Bernie Madoff scandal). This makes it all the more important to consider every investment scheme minutely, particularly with respect to risk vs. reward. While no investment plan is truly risk-free, some have a better chance of imploding than others. At the same time, compare the investment plan against your current investments. If the rate of return isn't significantly better (and if it is, it should set your alarm bells ringing) and the risks higher, perhaps it would be wiser to continue with your existing scheme. The slightly better returns cannot offset the risk associated with new, untested investment schemes.
How to Spot a Bogus Investment Scheme
Once again, apply the 'too good to be true' rule of thumb. Investment schemes that offer double-digit returns and make no mention of involved risks are highly suspect. Any scheme sold to you with a 'hard' sell should be treated likewise. Similarly, try to stay away from investments in financial instruments neither you nor your advisor fully understand. To conclude, bogus financial advice is usually easy to spot provided you observe the rules of common sense and don't let yourself be blinded by greed. Photo Credit: oddsock via Flickr.