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Money Girl

112 MG Fonzie was no Ponzi

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Broadcast on:
25 Feb 2009
Audio Format:
other

Like what you hear? Help us out by writing a review at iTunes. Questions go to money@qdnow.com. Thank you!

Hey, Spotifyers. Ever wondered how to save for retirement? Advocate for yourself in the workplace? Pay down debt. Women Talk Money is here to answer all your money questions. Click or tap the banner to join the community today. Brought to you by Fidelity's Women Talk Money. My dad works in B2B marketing. He came by my school for career day and said he was a big row Az-Man. Then he told everyone how much he loved calculating his return on ad spend. My friend's still laughing me to this day. Not everyone gets B2B. But with LinkedIn, you'll be able to reach people who do. Get a $100 credit on your next ad campaign. Go to LinkedIn.com/results to claim your credit. That's LinkedIn.com/results. Terms and conditions apply. LinkedIn, the place to be, to be. [MUSIC] Hello and welcome to Money Girl's Quick and Dirty Tips for a richer life. I'm your host, Laura Adams. This show is about Ponzi schemes and tips to help you identify these incredibly risky investments. Ponzi is a cool guy from the classic sitcom Happy Days. Ponzi was a very uncool guy from the 1920s who built investors out of millions using an illegal business model. Charles Ponzi didn't actually invent the scheme, but he certainly became notorious for it. He was buying international postal reply coupons at a discount and then redeeming them for U.S. postage stamps at a higher value. He promised investors amazing profits that were supposed to come from this legitimate business. However, this wasn't where the investment money was really going. I'm sure you're familiar with one of the latest and biggest Ponzi schemes in history perpetrated by Bernard Madoff. Yes, he's the guy who made off with over $50 billion of his investors, or should I say victim's money. Ponzi scheme is now a term used for any fraudulent operation that promises a high return to investors. The fraudulent part comes from the fact that the returns are not generated by profit from legitimate investments. The high returns are paid to investors out of money received from new investors, so the new money is what makes the promised high returns to earlier investors possible. This house of cards holds up only as long as there's a steady stream of new investors injecting money into the operation. Ponzi's eventually collapse under their own weight when they get so big that the inflow of new money can't cover all the promised payouts. And as more investors get involved, the chance that someone will alert the authorities increases. Some Ponzis such as Madoffs are even registered with the SEC. No two Ponzis are exactly alike. This is why they can be very difficult to identify even for sophisticated investors. Heck, even the SEC and some big-time folks on Wall Street got duped by Madoff. His investment method was marketed as being too complicated for most people to understand. We now know that his real method was nothing more than the exploitation of his upper-class social networks. 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People get sucked into Ponzi schemes because the promise of extraordinarily high returns can cloud even the most prudent investors good judgment. The financial meltdown of 2008 left Madoff exposed as investors started demanding cash that he couldn't possibly return. Here are some bright red flags to watch out for that may be signs of a Ponzi scheme. Number one, the promise of an unusually high or consistent return on investment. This is almost impossible to achieve from legitimate investments because their value fluctuates over time. I've heard that Madoff's investments paid 10 to 12% per year. This isn't a crazy return, but it is impossible to maintain for decades during good and bad financial markets. Number two, one central person who has a top secret investing formula. Any investment that relies on the expertise of one person is suspicious. Number three, a lack of transparency about underlying investments. There's no substitute for detailed financial information. Protect yourself by requesting statements that have been audited by a reputable accounting firm. Number four, an urgency to recruit new investors. High pressure sales tactics may be used over the phone or in person. Be very wary of unsolicited investment offers you may find in a fax, email, or internet posting. And five, persuasion to invest targeted toward religious or affinity groups. Conmen are so named because they're out to gain your confidence. They try to deceive people who don't have much financial knowledge or won't ask many questions. Anything that sounds too good to be true, well, you know the rest. All investments carry some level of risk, especially those offering high returns. But it's always a good idea to do some independent research before investing your money. Compare promised returns with the current returns that stock indices are receiving, and be sure to understand a company's business model and its products or services before investing. Being an educated investor is your best defense against falling prey to fraud. Are you looking for successful strategies to save and invest for a secure future, even during market volatility? Check out my new audiobook Money Girl's Guide to Retirement Planning. Find it on iTunes at Audible.com. I'm glad you're listening. Cha-ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. Get Money Girl and other great shows from quick and dirty tips streamed to your iPhone. Download Stitcher free today at Stitcher.com. Introducing Wendy's new Salsy Nugs, the nugs you love covered in your favorite sauces. So no matter what flavor you're craving, Wendy's has you covered. Grab Wendy's new Salsy Nugs today. Open till midnight or later. And participating U.S. Wendy's, ours may vary by location. Imagine earning a degree that prepares you with real skills for the real world. 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