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Ponzi Schemes thrive in an ailing economy…

You get the sense that the increasing number of Ponzi Schemes (especially the latest MMM) mushrooming in South Africa is directly related to the financial pressures that are induced by our ailing economy. When there are large numbers of people struggling to make ends meet they become easy prey for the vultures circling them who take full advantage of the situation by promising outrageous returns which are nothing but lies and deception.

Robbing Peter to pay Paul A Ponzi

Scheme pays returns to early investors using capital from investors who join the scheme at a later stage. For example, you are promised a return of 20% per month on your investment of R10 000. At the end of the month your receive R2000 and you are so delighted that you tell family and friends. After all, you made a great investment decision, right? Meanwhile the scheme used your money to fund other investor returns giving you the idea that your R10 000 was invested for the next return. Now as your friends dive into the scheme their funds are used pay the R20% due to the existing investors including you. When you do the permutations, the scheme is destined to implode as the numbers of new investors required to prop up the existing ones simply run out.

Don’t get caught

Don’t get lulled into a ‘get rich quick’ promise. Sure, the higher the return you seek should be relative to higher risk but there are limits. When a guarantee is thrown in become suspicious. Spectacular guaranteed returns are too good to be true. Check if the organisation is licensed with the Financial Services Board as a Financial Services Provider. If it is then it will have a Licence Number. This is no guarantee, but at least you have some idea that the company has been approved. Ponzi Schemes can bye-pass the regulatory environment, so if no number then there is a reason to be more careful. Check out the company. Where is it based? How long has it been in business? What assets, products or services are they in the business of?

Get a second opinion. Ask a reputable financial advisor for advice. An experienced advisor will not be enticed by spectacular promises as he will understand that wealth is created over time. If the offer is extraordinary a good advisor will see the pitfalls.

For more information, listen to Paul Roelofse speaking to Sam and Africa on Weekend Breakfast below...

Read more from Paul Roelofse at www.investforlife.co.za

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