Important Tips to Avoid Investing in a Ponzi Scheme

Last week, I read a heartbreaking article about a grandson investing a large sum of money for his grandmother in a Ponzi scheme. Sadly, I have seen many of these schemes in my decades in the industry. So why do people fall for these scams? Let me share the main reasons and two key things you can do to avoid one so that you or your loved ones never experience this.

How to protect yourself from investing in a Ponzi Scheme

Before we dive in, it's important to understand why people are attracted to these scams. No doubt you’ve heard the saying, ‘If it's too good to be true, then it probably is.’ Never has this statement been more accurate when it comes to Ponzi schemes.

I believe people get caught in these investments because they have no way of measuring what is too good to be true. How much is too much? The story is the same with every Ponzi scheme: we’re told we can make very good returns. But what they really hear is that they will make a lot of money in no time with very little effort, which we all know sounds too good to be true.

Next, the person getting scammed makes no effort to stress test the investment through proper research or due diligence. Instead, they focus on how much they’ll make and ignore the risks. This is usually because they are asked to participate by people they trust, such as the person running the Ponzi scheme or a friend or family member who has already invested. Consequently, they drop their guard because they’re told they need to be quick so they don't ‘miss out’.

If you aren't willing to do the research to pick apart the opportunity presented or you have FOMO, then, unfortunately, you might just be the type of person which could fall for a Ponzi scheme. So, what are the two ways to avoid them?

Firstly, and most importantly, ensure that the business is registered with the Australian Securities and Investments Commission (ASIC). You should also request the company's Australian Business Number (ABN) or Australian Company Number (ACN) for further verification. You also need to verify their claims independently and question unusually high returns.

Secondly, seek out an independent expert, such as an accountant or financial planner, and let them examine the opportunity. If they smell something fishy, do not invest. You need to pay attention to the warning signs that it’s too good to be true. If you suspect fraudulent activity or believe you have fallen victim to a Ponzi scheme, report it to ASIC or the Australian Competition and Consumer watchdog.

What were the best and worst-performing sectors last week?

The best-performing sectors included Real Estate, up 3.82 per cent followed by Materials, up 2.10 per cent and Energy, up 1.70 per cent. The worst-performing sectors included Consumer Staples down 0.55 per cent followed by Utilities, down 0.47 per cent and Communications Services, up 0.03 per cent.

The best-performing stocks in the ASX top 100 were Bellevue Gold, up 12.20 per cent, Fisher & Paykel, up 9.86 per cent, and A2 Milk, up 7.45 per cent. The worst-performing stocks were Medibank Private, down 3.12 per cent, South 32, down 3 per cent, and IDP Education Limited, down 2.99 per cent.

What's next for the Australian stock market?

Last week, the All-ordinaries index was up over 1 per cent, with the buyers stepping in at the 7,900 level to take the index higher. In my previous report, I mentioned that 7,900 was a potential reversal point, and while the buyers have agreed so far, I would like to see a continued push upward to break above the all-time high.

If this occurs, I can confirm that the All-Ordinaries index has formed the short-term low I have been anticipating and that the market will continue rising to the 8,200 to 8,400 point range in the near term. I have also spoken about setting yourself up for the next opportunity to buy following the short-term pullback, so this week let's look at some sectors that held up well and are set to benefit from the next move up on our market.

The Materials and Energy sectors have stood out, posting some of their biggest weekly gains two weeks ago. Bear in mind that the market also recorded its biggest one-week fall this year in the same period.

Right now, it's clear that money has been flowing into these two sectors while the market was falling, which tells me that if you are looking for good value, these are the sectors to focus on. Some notable names in the Materials and Energy sectors that have the potential to do well in the next month or so include Woodside Energy Group, Santos, RIO, BHP and Fortescue Metals.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.