Take Steps To Avoid Investment Scams

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Although we may feel Payson, Star Valley and the surrounding areas have relatively low crime rates, there are still unscrupulous people and companies that try to take advantage of unsuspecting investors. The Internet has made it even easier for these predators to reach a mass audience.

To avoid potential scams, you need to be vigilant, and you need to ask questions -- lots of them.

While there are many types of fraudulent activities floating around the Internet, one of the most common scams resembles a "pyramid scheme," by which shady operators initially appear legitimate by using money coming in from new recruits to pay off early stage investors. If you participate in such a plan, you might make a little money right away, only to be encouraged -- or required -- to buy a "membership" so you can boost your earnings. However, when the pyramid gets too big, it will eventually implode, because, at its heart, it is a dishonest arrangement that can never truly be funded enough to reward all investors.

The Securities and Exchange Commission (SEC) has issued guidance for you to defend yourself against "get rich quick" schemes. Here are a few of the SEC's suggestions:

• If it sounds too good to be true, it probably is. This piece of advice has been around a long time, and it's just as valid today as when it was first uttered. If someone promises you a high rate of return, be suspicious. Compare what's being offered with current returns of well-known stock market indexes.

  • Investigate a company before you invest. The company that "pitches" you an offer may well have an impressive-sounding name, but that doesn't mean much. Before you spend a dollar, contact the secretary of state where the company is incorporated to see if the company is, in fact, a corporation, and whether it is in good standing. You can also call your own state securities regulator to see whether the company, or whoever is promoting the offer, has a history of complaints or frauds. If the company has only a post office box or is unwilling to provide you with information about its location or management, you are looking at a "red flag" already.
  • Ignore testimonials. If a company is fraudulent, it won't have much trouble generating fake testimonials from "satisfied customers."
  • Say "No, thanks." to "guarantees." When a promoter guarantees you a high rate of return, you can be assured there's something amiss. In the investment world, high returns are typically only achieved by higher-risk vehicles -- and they don't offer guarantees. In fact, no reputable financial professional will promise you a specific return on a stock or other variable security.

Forget about shortcuts

Most of the schemes you will encounter promise big returns in short periods of time. But in reality, that hardly ever happens. Substantial growth in investments typically occurs over a long period of time -- which means that, as an investor, you need patience and discipline above all else.

Ultimately, there is no shortcut to investment success. You need to evaluate each investment opportunity based on your individual goals, risk tolerance, portfolio balance and time horizon. This approach may not provide you with "hot" opportunities, but it won't burn you either.

-- Scott Flake is a licensed investment representative with the firm of Edward Jones.Call (928) 468-1470.

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