How to Spot Investment Scams and Speculative Bubbles

Written by Kelley Keehn

Wednesday, March 28th, 2018

At a recent BrainStation event in Toronto, Preet Banerjee and I spoke about investment basics to a sold-out crowd.

After the event, I stayed back to answer questions. Three young investors asked me about getting into Bitcoin and wondered if it was a promising idea for them.

No expert has a crystal ball that will reveal whether Bitcoin or something else becomes the currency of the future, or merely a speculative bubble as precarious as the Tulip Mania craze that crashed in 1637.

Right now it may be Bitcoin, but it could just as easily be about a gold deal, marijuana stock, a hot land offer or more.

The most important thing to keep in mind when starting investing—or even if you're years into a portfolio—is to never forget the basics. And that greed and fear need to be reined in when selecting investments or watching the ones you have.

"What we learn from history is that people don't learn from history." -Georg Hegel

Right now, there are countless fraudsters who want to entice you with over-the-top returns promising no risk to your money. There will always be a popular stock that's trending or other offering that may not be fraudulent, but still, may not be right for you.

Here's How to Spot the Scams

"Scam artists are everywhere, and many can appear to be quite legit and professional. Investors must do sufficient research and take appropriate measures to protect themselves," says Brett Millard, Certified Financial Planner and board member with the Financial Planning Standards Council.

"It may sound a bit cliché, but if a deal sounds too good to be true, it probably is. Current rates for guaranteed investments such as GICs are hovering around 2% per year, so if a 'guaranteed' investment promises 5% or even 10% per year in returns, I can guarantee you that it is a scam."

Check First Before Investing

Nicole Tuncay, Senior Advisor of Investor Education for the Alberta Securities Commission has a simple mantra: "check, protect, then invest." More details about each step can be found here.

Red Flags to Watch Out For:

  • Time pressure, being told you "need to buy now"
  • The investment is offered by someone claiming to be a "guru" and you need to trust them
  • Little to no documentation – won't provide specifics in writing
  • Flashy website with lots of offers and claims, but little to no information on the promoter or seller
  • Guaranteed investment returns higher than a GIC at your bank
  • Being told there's "no risk"
  • The details are vague or confusing

Preying on Similarity

In this very low interest rate environment, many investors are looking for the promise of higher guaranteed investments with minimal risk. Promoters looking to cash in on this know that offering something you may deal with every day – like your mortgage – will make you more comfortable and vulnerable to letting your guard down.

"Beware of the real risks of investing in mortgage debt," warns Millard. "Many consumers think they're investing in a mortgage similar to their own. When you consider that your mortgage is charging around 3% per year in interest and the mortgage-type investment you're looking at is paying out 10% per year in returns after paying the salesperson's commissions and the costs to run the investment company, the math obviously doesn't make sense. The only people willing to pay 25% interest on this type of mortgage are those that are at an extremely considerable risk of defaulting."

Borrowing to Invest

If you're borrowing money to invest, you need to be doubly aware and diligent before committing. Read all the fine print, reach out for a trusted professional second option if the offer is confusing, and never sign on the dotted line of any offer that you don't fully understand.

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