GEORGE BUSINESS NEWS - Many scams promise investment returns of 20% to 30% p.a. which, for consumers facing a challenging economic environment, sound very attractive. But how do you distinguish between sound investments and scams?

If you want to earn an income, there is a finite number of financial instruments you can invest in. These range from conservative cash investments to more risky equities. Every asset class has a risk/return profile: the lower the risk, the lower the expected return. Taking on greater risk means that, over time, you will get a higher rate of return but you will experience more volatility and will likely need to commit your capital for at least seven-years to realise those returns.

Equities have provided an average return of 13% over the past 100 years. There will be years of 20%-plus returns and years of significant negative returns. So if someone offers you a guaranteed 20% to 30% return, you know they must have a questionable method of delivering that.

Scams come in various forms, but they often make up the shortfall by giving you someone else’s money. For example: Ms A invests R100 with her “investment advisor”, Mr Ponzi who promises her 30% p.a. returns. In order to achieve just a 13% return (R13, in this case), Mr Ponzi will need to invest that money for a long-term period. Mr Ponzi now needs to find an additional R17 in order to deliver R30 to Mrs A, otherwise the scam falls flat from the outset. What does he do? He take Mr B’s money and uses it to pay Ms A’s R17 shortfall. Mr B’s returns will need to come from Mr C. And so the cycle continues. The moment new inflows don’t meet Mr Ponzi’s distribution needs, the scheme collapses.

For this reason, only engage with a financial advisor who is a registered representative of an authorised Financial Service Provider company and who is authorised to give financial advice. If a person does not meet these criteria, walk away.