Monday, August 30, 2010

No such thing as high returns, low risk

Sunshine Empire episode contains lessons on how to spot a scam. Sunshine is not the first Ponzi-like scheme and will probably not be the last. There was the Gemini Chit Fund in the early 1970s. In a Ponzi scheme, people are enticed to investing by promises of high returns. However, the returns are paid out of funds from new investors entering the scheme. All will go well until the flow of new funds dries up. Warning bells should ring if you are asked to invest money and rope in others with you.

Only professional trained people can provide financial products and services and you will enjoy the protection of MAS laws if you deal with a regulated entity. MAS provide a Investor Alert list which details the entities it has not authorized to conduct regulated activities here.

Here are some questions you should ask:
  • Is the provider regulated?
  • What are the returns dependent on? Is the return being paid from new inflows of money or from actual investments?
  • When will the returns be paid? What is the amount and how much is guaranteed? Who provides the guarantee?
  • How long must you stay invested? If you want to withdraw your money prematurely, what are the penalties and procedures?
  • How can you monitor the performance of the investment? What reports will you receive and how often?
There is a universal concept in investment known as risk-return trade-off: Low risk level is associated with a low potential return, while a high risk level offer potential higher returns. High returns investment product means there is a higher risk of losing the capital. There is no free lunch in the world, thus there is no such thing as a zero-risk, high return investment.

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