Don’t Get Ponzied

By Larry Kahaner


When experts offer ways to avoid being taken in by Ponzi schemes, the suggestions often go to due diligence and checking out the person who wants to invest your money. They also suggest looking up the person’s criminal or civil sanctions from the Securities and Exchange Commission (SEC).

            These are fine ideas but miss the mark. To me, not being Ponzied is a matter of sticking to smart investing tenets rather than searching for illegal behavior.  

            For example:

  • Low Risk:  Ponzi schemers offer low risk and high reward investments. In real life, the higher the risk the higher the reward. The market usually rewards people for taking on more risk. So, when someone offers you a high rate of return for little risk, that’s a red flag. Remember: About 80 percent of active money managers cannot beat the indexes and that’s why I’m an unabashed proponent of index funds.
  • Diversity: One of the saddest results of Ponzi schemes is when people lose all of their savings or retirement. Never put all of your money into one fund, one person or one investing idea. Period.
  • Invest in what you know: If you don’t understand what the manager is investing in, don’t do it. If the manager cannot explain what he or she is doing in clear simple language, if it doesn’t make sense to you, keep your distance.
  • Transparency: One of the items that Ponzied people say is that they weren’t allowed access to their paperwork. They never got a full accounting. Phone calls went unanswered. Ditto for emails. A legitimate investment advisor will be responsive and willing to open the books even before you invest with him.
  • Your money is not liquid: Anytime you want your money, you should be allowed to get it. If you keep getting excuses about why your redemption check was not sent or why it was for the full amount, then you’re in trouble.
  • Consistent results: Stocks and bonds go up and down. If your advisor gives you consistently higher returns, it’s a danger sign. Everyone has a bad year or bad month. Ponzi schemers always seem to do well.
  • Friend of a friend: You hear it over and over: “He’s a friend’s friend” or “Joe knows him.” Don’t let this closeness sway you. While it’s okay to get an introduction or suggestion from a friend or relative, don’t let it influence you. Investing should be emotionless.
  • Admit you may be wrong. Even seasoned traders have trouble taking losses. If something seems wrong, don’t give the advisor any more money. Cut your losses. There’s a show on CNBC called American Greed, which has stories about disreputable financial people and the damage they do. One of the common threads is individuals who give their advisor additional money even though they have a gut feeling that something is amiss. Most of us don’t want to admit when we’re wrong so we cover it up by giving the bad guy even more money. Does this make sense?

The SEC has some pointers to prevent being taken in by financial predators.  Most important: Keep your greed in check.


A former Washington correspondent for Business Week magazine, Larry Kahaner is the author of 15 books, including the best-selling Competitive Intelligence, a Book-of-the-Month selection that has been translated into six languages. He has also written Values Prosperity and the Talmud; Business Lessons from the Ancient RabbisThe Quotations of Chairman Greenspan and AK-47; the Weapon that Changed the Face of War. Full bio.

His in-person, interactive, multimedia presentation titled Fiscal Fitness Boot Camp  is available to colleges, universities and companies. You can email him directly at Larry Kahaner.

He is represented by Wolfman Productions, Inc.


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