8 Ways to Ponzi-Proof Your Portfolio
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You would think that after the Bernie Madoff scandal was exposed, the era of Ponzi scammers would come to an end. Sadly, this is not the case.
Recently, former Denver Broncos quarterback John Elway and his business manager were scammed out of $15 million in a massive Ponzi scheme. The Colorado district attorney alleges that hedge-fund manager Sean Mueller may have stolen as much as $122 million from hapless investors.
These schemes are deceptively simple. Typically, the fund manager makes no investments. He pays off old investors with funds contributed by new investors. Word of outsized returns spreads, and gullible investors—lured by the promise of reward without commensurate risk—flood the fund with their hard-earned money. Inevitably, the house of cards collapses, criminal charges ensue, and investors get pennies on the dollar, if anything.
It’s very easy to protect your portfolio against Ponzi schemes and other scams. For starters, I recommend an excellent book by Tom Ajamie and Bruce Kelly, Financial Serial Killers. You’ll be scared straight. Here’s a list of tips adapted from the book and my own recommendations for protecting yourself from con artists who will say anything to get their hands on your money:
1. Make all investments directly to a custodial account in your name only. The custodian should be a household name, like Charles Schwab, Fidelity, or TD Ameritrade. Never make a check payable to your adviser or fund manager. All checks should be payable to the custodian. You should be able to access your account from the website of the custodian. Following this one simple rule would eliminate most fraudulent conduct.
2. Beware of high returns, especially returns that are “guaranteed.” Increased returns always mean increased risk. There’s no free lunch in the investing world.
3. Don’t rush to invest. High-pressure tactics are designed to create a sense of urgency where none exists. Take your time and do your due diligence.
4. Don’t let greed sway you. Con artists prey on the greed of their clients. There’s no easy way to make money in the market. The only thing “easy” about investing is how quickly you can be conned by the false promise of a fast buck.
5. Beware the con artist posing as your friend. He belongs to your club, worships with you, is your golf partner and often your best friend. He’s also the person you would least suspect of scamming you. That’s why he’s so dangerous.
6. Remember that investing is very simple. Complexity is the best friend of the con artist. Remember derivatives? If you don’t understand an investment after a ten-minute explanation, don’t invest in it.
7. Don’t be lured by a promise of steady returns. No one legitimately makes money in all markets. If you are promised steady returns with investments exposed to the stock market, run for the door.
8. Don’t rely on the mainstream financial media for your information. Time on radio and television stations is often purchased and then made to appear like legitimate news. There’s no software or trading program that can produce positive returns over the long term. It’s the sellers of these items that profit, at the expense of the buyers.
Financial scammers are tough to spot. They look just like you and me. Instead of relying on appearances and promises, follow these guidelines to Ponzi-proof your portfolio.
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