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Smart Money?

Six ways to avoid investment traps

WILLIAM J. LYNOTT

Despite the pervasive publicity surrounding the case of master scam artist Bernie Madoff, Ponzi scheme “fraudsters” are still successfully reigning in suckers who should know better.

Many people whose primary goal is separating you from your money can still be found in the unlikeliest of places. That’s why it’s so important for you to conduct your own due diligence when it comes to investing your money.

Here are six tips you should follow before you select a financial advisor or participate in an off-the-beaten-path investment.

1 Ask questions before it’s too late.

Even if it’s a friend, relative or trusted financial advisor asking you to invest, you need to know:

▸ Exactly how much money am I being asked to invest?

▸ Precisely what sort of returns can I expect?

▸ Are the proposed returns guaranteed? If so, by whom?

▸ What happens if I want to take out some or all of my money?

Take notice if there’s any hedging on these or any questions you may ask.

2 Be skeptical.

Get-rich-quick schemes aren’t likely to disappear any time soon, so avoid falling into these traps.

Investments that promise 10% or 20% returns or more are probably too good to be true and should be viewed with the utmost skepticism.

3 Bring a trusted advisor to interviews.

Don’t agree to turn over any of your money without a trusted advisor, such as an attorney or accountant, to help with your decision. Be especially wary if you are told that bringing another person to advise you is not necessary — a legitimate investment partner would not object to this.

4 Find out exactly who holds the money.

Make sure that you know which company has custody of your money and how you can contact them. Then, take the time to research any firm that you expect to take possession of your investment. Be especially leery if it is not a recognized brokerage firm, bank or trust company that has been in business for a suitable length of time.

Make sure that the account will be held in your name and that you will have access to your money if you need it. If you won’t have unlimited access to the money in your account (in a hedge fund, for example), you need to be even more diligent in your research on the reliability and reputation of the custodian.

Be wary if your interview is to be held in a conference room of a person or firm that is not involved in the proposed investment. If it is, find out why.

5 Don’t act in haste.

Never buy into an investment until you’ve had time to think it over and discuss it with a friend or family member. If you are being pushed to act right away, it’s time to back off.

6 Be wary of evasiveness.

Make sure answers to your questions are clear, direct and easy for you to understand. Remember Warren Buffet’s philosophy: never put money into an investment that you don’t understand.

Trust your instincts.

When a “gut feeling” tells you that things don’t seem right, be especially cautious. Human instincts are powerful defenses in times of danger. OM

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.

MR. LYNOTT IS A FREELANCE WRITER WHO SPECIALIZES IN BUSINESS MANAGEMENT AS WELL AS PERSONAL AND BUSINESS FINANCE. VISIT WWW.BLYNOTT.COM, OR SEND COMMENTS TO OPTOMETRICMANAGEMENT@GMAIL.COM.