High Yield Investment Fraud Schemes – How they Work, How to Avoid Them

Investing carries some obvious risks, and everyone who enters the investment world is obviously aware of that fact.  But for many, falling into the trap of high yield investment fraud schemes is easier than they likely realize and can lead to the loss of hundreds, thousands, and even millions.  While these schemes – usually called Ponzi schemes – always eventually collapse upon themselves in one way or another, it’s important to recognize how they work so that you can better prepare yourself to avoid them.  One bad investment could cause your portfolio to take a hit you’re unlikely to easily recover from.

Most high yield investment fraud schemes draw in victims through that promise of high yields.  Essentially, they promise returns that are much higher than other investments offer.  In some cases these sound too good to be true, but some investors simply ignore their gut instincts and believe the promises.  That’s often because a good scheme runner will be able to show some very convincing figures to go along with their phony, unregistered securities.  If you’re being offered high returns on investments, there’s certainly a chance that it’s legit.  But be sure you take a closer look before you hand over your money.

Basically, high yield investment fraud schemes work because they actually are able to repay investors for a period of time.  But they actually pay dividends to early investors using either their own money or the money given to them by later investors.  In some cases, those same early investors are actually convinced to reinvest in the scheme, thereby keeping the scheme running for an even longer period of time.  It’s a house of cards that usually collapses on itself within a matter of years or even months as more payouts are requested and the funds to make them are depleted.

Authorities usually latch onto high yield investment fraud schemes fairly quickly as well, mainly due to the fact that the unregistered securities are fairly easy to spot.  But within that short window of time, investors have lost fortunes and been reduced to pennies.  The best example of this is Bernie Madoff, but obviously many other conmen have run these same schemes throughout history.  Your best defense against high yield investment fraud schemes is diligence and research.  Find out as much as you can about an investment before you commit to it.  It’s a good all-around investment strategy anyway, and one that you should certainly keep in mind to protect yourself.

About Richard Wilson