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Of Red Flags and Investment Scams

“I have investment for everyone who are interested.
Invest 10k for 6months time.
And the end of 6months
You get 15500 fixed amount. Pm me.

No scam
No bogus
No networking
Pure investment”

I saw the above posted on a popular local investments FB page and as expected, it got a lot of comments, mostly sarcastic or derogatory…and for good reason. Given the current investment climate, this post sounds to good to be true. It doesn’t help that the person who posted it did not immediately provide details as to what kind of investment this is.

It is in light of the proliferation of such investment proposals that are targeted at the well-meaning but often ignorant public that the very important and basic principle of risk and return is explained. The higher the required return, the higher the risk of loss.

Broken Piggy Bank

How does knowing this esoteric principle help us in red-flagging possibly bad investments or scams?

First, returns on variable income investments, i.e. non-interest earning, like stocks, mutual funds, currencies and options are market driven and cannot be guaranteed. People who offer such products can only give you expected returns based on historical performance but as far as variable income investments are concerned, history rarely repeats itself if at all. So if you’re offered a variable income investment that’s guaranteed…think again!

Second, the rates of return offered or guaranteed can give you signs if the person or institution offering said investment is in dire straits. The more desperate is the need for funds, the higher the rates offered.

In this regard, awareness of how much is the going market rates for certain types of investments can go a long way in protecting you from either being conned or investing in a very risky but legit instrument. To have an idea of prevailing deposit rates, you may go to www.pdic.gov.ph and for stock price updates, just go to www.pse.com.ph.

If knowing is half the battle, then knowing the basic risk-return principle significantly increases your chances of successful investing.

Joseph Gerard “Seph” Romana worked as a Bank Examiner at the Philippine Deposit Insurance Corporation (PDIC). He is former Market and Liquidity Risk Officer with Metrobank, former treasury trader at United Coconut Planters Bank, and former stockbroker at All Asia Securities and Apex Philippines Equities Corporation. Seph is also a resource speaker for his church’s Biblical Personal Finance seminars. On his artistic side, Seph also was the former frontman of the band Army of One. He advocates financial literacy among artists and young professionals. He is currently the President of Angat Pilipinas Coalition for Financial Literacy.

*This is a guest post.

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Photo credit: Broken Piggy Bank by 401(K) 2012

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