5) Red Flags

Smart investors typical heed the warning, “If you don’t understand, don’t invest.” Be cautious of investment strategies or companies that you do not understand.

Be cautious of Fantastic or “too good to be true” investment returns. Having realistic expectations–8 % to 10% per year total return is realistic (see early essay, “Realistic Expectations”). Remember doubling your money in 2-3 years means annual returns of around 30% (rule of 72).

As mentioned earlier, – reputations, referrals and track records are important. “Flashy appearance, “slick demeanor” and “over-the-top” presentations may not equal superior investment performance.

The following are some lessons learned from the Bernie Maddoff Fraud- How he snared many unsuspecting investors using the following techniques:

Exclusivity-you and only a few others can get in. Such and such celebrity or successful entrepreneur invest with our firm – “I can get you in.”  

Lack of transparency - the investments are so exclusive and complex that they are hard to value and hard to get in and out of.  Your investment is locked up for months or years.

Lack of controls regarding the custody (holding) of your money - Bernie Maddoff required his clients to write him a check or ACH/Wire their money to his company. All client funds were co-mingled without adequate controls. This allowed him to “cook the books” and steal. Make sure you understand exactly how your money is held and the controls in place to protect it.

These are some of the “Red Flags “you should be on the lookout for and reason for pause and concern.

Successful investors realize that “preservation of capital” can be more important than “appreciation of capital.”