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Ponzi schemes are a classic type of fraudulent investment, but they continue to catch even the most wary of investors. In 2008 Bernie Madoff’s Ponzi scheme, one of the biggest ever, managed to swindle money from high-profile individuals such as Stephen Spielberg and Liliane Bettencourt. Ponzi schemes are not going out of fashion any time soon, so here are 5 top tips for spotting a Ponzi scheme – to help you make sure you don’t find yourself on the next list of victims.

1. If it seems too good to be true, it probably is.

This well known saying applies… well when it comes to spotting a Ponzi scheme. As easy as it is to be lured in by the promise of big returns, remember that if the prize is unrealistically good compared to other market investments then something may be seriously off about it. It may be hard to hold off while everybody is flocking to ‘make money’, but being cautious in the short term can pay dividends later on.

It is also important not just to be wary of an unrealistic return but also unrealistic consistency. No investment makes money month on month as they all incur bumps and losses. If your investment is too consistent, it may be time to start asking questions.

2. Question your recommendations

If your best friend recommends an investment to you and he/she is a smart person, then you might ask yourself why shouldn’t trust their judgement. The answer is that those at the first rungs of a ponzi scheme do actually see their investments returned – it is the later rungs that lose out. Instead, ask your friend some questions. How well do they know the person who is brokering the investment? Have they seen documentation about how the money is invested? Do they have any suspicions?

3. Do the math

 Often if you pay attention to the sums and ask for statements it is possible to notice if the numbers don’t add up. If you’re not a mathematical wiz, get a financial accountant to look over the investment. If you see a lot of vague labels like ‘securities’ on investments, take it as a red flag. Ask for specifics and if you’d don’t get an answer, be very wary of where your money is going.

4. Check out the background of the investment with a PI

Often referred to as investigative due diligence, both individuals and organisations often hire private investigators to check the background of the person whose business they are investing in. Although not foolproof, it is one of the best methods of ensuring that the investment is sound. Often those running Ponzi schemes have red flags in their background (convictions/fake credentials/overspending) that a PI can pick up. It is a small expense compared to the expense of losing money on an investment.

5. Only invest small amounts

If you do choose to invest in a non-traditional scheme, make sure that you spread your money across different investments and have a diverse portfolio so that any losses are not too painful. By only investing small amounts in a scheme that you have doubts over, you will not lose too much if those doubts turn out to be real.

It is not always possible to pick up on a Ponzi scheme, often because the returns aren’t extravagant and the ponzi-runner is trustworthy. Bernie Madoff’s Ponzi scheme was successful because he was a former chairman of NASDAQ and well respected in financial world. However there are always signs, and if you keep weary you can protect your money from unscrupulous characters and bad investments.

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Posted by Charlie Oszvald

This is a guest post by Charlie Oszvald. Occasional guest blogger on asset searches and full time on personal finance. Charlie currently represents Beacon Investigation Solutions a private investigation company licensed in 45 states across the US.

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