Common Cents: A deal too good to be true usually is

By Tom Mills

Whether it is a high interest trust deed, sub-prime loans, or just a loan to a relative, beware. There are unscrupulous individuals who would love to get your hard-earned money. You say it can’t happen. Not here, or not to me? Don’t be so sure.

Most investment rip-offs appeal to our own character flaws. A flaw like greed. “I can beat the system” or a “something for nothing” mentality is often the motivation to take a chance on an investment that we know is risky or at least makes us feel a little uncomfortable.

I’m not saying that all risk is bad. Without venture capital and without the entrepreneurs who start companies with the help of friends, relatives and those willing to believe in a dream, our country and certainly our economic system would be the lesser. I’m all for this process. What I’m not for is taking uninformed risk. What I’m not for is taking your nest egg and giving it to enthusiastic and glib sales people who have their own best interest in mind, not yours.

These people are trained by experts, drilled and rehearsed to sound sincere and to answer your every objection. They understand our motives and they play upon our flaws.

In today’s sophisticated investment world, there are plenty of opportunities- some good, some bad, some just mediocre. But if you follow a few simple rules, you can significantly reduce the odds of getting burned:

• The old saying is still true: “If it seems too good to be true, it probably is.” Aside from certificates, savings bonds, and the like, very few investments can guarantee — or even reasonably assure  you of — a specific return or dividend. Be wary of investment advisors that promise you high rates of return on investments that look risky. Try the sleep test. If you can’t sleep when you consider it, don’t invest.

• Know whom you are dealing with. Always check out the credentials of any financial adviser. Find out what license he or she holds. Determine the advisor’s background, education, experience, professional affiliations, etc. Get references, and talk to people who have done business with the advisor. Look into the background of any company you’re not familiar with. Don’t assume. Don’t trust appearances. Take time to check it out. Creating artificial deadlines is often another tactic of would-be rip-off artists.

• Know the investment. Securities laws require, in most cases, that you see a prospectus or offering memorandum before you make an investment. Don’t buy anything without seeing one. And, more importantly, READ it, and ask questions about anything you don’t understand. In many cases, investors are dissatisfied with a particular investment not because it didn’t perform as expected, but because it was inappropriate for them. Make sure the deal is in writing.

• Do not invest without a plan. When you invest haphazardly or emotionally, you’re more inclined to invest in something you don’t want or need. Before investing in anything, sit down and determine your goals and objectives, and your risk tolerance. If you are unhappy with volatile investments, resolve to stay away from them no matter what kind of return is possible and stick to your guns.

• Never purchase an investment from a telephone solicitor. If you do, you have no idea about the reliability of the seller or the product. Unfortunately, too many people send money to a place they’ve never heard of, or give out their credit card number on the phone … and a lot of them get burned. If someone tries to sell you an investment (or any other large purchase item) over the phone, ask them to send you a prospectus, and don’t settle for anything less.

Avoiding improper or speculative investments is not difficult if you follow these few rules. Never invest unless you are sure of what you’re getting into.

Notable quote: “The only people you should ever want to get even with are those who have helped you.” — John Honeyfield

Tom is a registered investment adviser and certified financial planner. If you have questions or topics, call or write him at 1030 Seminary St., Suite D, 254-0155, fax 254-0158 or e-mail suntrm@aol.com

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