If it sounds too good to be true, it probably is

Looking to generate more than the 1-2 percent yield that you can get from a bank deposit? How does 2-5% a month sound? For clients who invested 50-60 million NIS, that sounded fantastic. So fantastic that one individual sold his home and took the proceeds of the sale to invest in this scheme. All was well until earlier this week when the Savion based ‘adviser’ pitching this investment turned himself in, and now faces fraud charges for his Ponzi scheme.

Many individuals who invested their savings with this firm are now unsure whether they will recover anything. Dazzled with the promise of unrealistically high “guaranteed returns,” many of these unfortunate victims decided to invest, and they may now end up with nothing.

Remember the old saying, “If it sounds too good to be true, it probably is”? Whether you received marketing information from a bank located in the former Soviet Union, “guaranteeing” 8% US dollar deposits, or a letter you just received in the mail saying that you won $5m. in a lottery that you never entered, or someone promising very high “guaranteed” investment returns, the consumer needs to realize that building wealth is a long-term process. There are no quick fixes.

Instant gratification In today’s western society, the concept of instant gratification is constantly being reinforced. Whether it’s our increasing dependence on fast food or the notion of getting rich quick, we have lost the virtue of patience.

The local media is filled with advertisements pitching various real estate opportunities both in Israel and abroad. They often make very seductive claims, such as a minimal investment with returns of over 200% within three years, or a “guarantee” of a particular return.

But how do we know if such claims are legitimate or not? The first rule is always: buyer, beware. If something sounds too good to be true, it probably is. The second rule is to read the fine print carefully. Oftentimes the small print on the bottom of the advertisement makes it very clear that the “guarantee” comes with many strings attached, and there is a reasonable chance that you can indeed lose some or all of your money. The third rule is to always ask detailed questions, and never let the salesman off the hook.

Ask pointed and specific questions to get a better understanding of the investment. Always inquire if there are any risks, and what they entail. If the answer is, “there are no risks,” or lip service is paid to explaining the risks, there is a good chance that you are not getting the full information about the investment, and you should think twice about investing.

This highlights why investors should work with licensed investment professionals. They are very much limited in their use of the word “guarantee,” which is only used for an investment guaranteed by the US government.

For a licensed investment professional, inappropriate usage of the word guarantee is against the law, and regulators take this issue very seriously.

Long term In reality, it is virtually unheard of for a person to accumulate wealth overnight. Rather, it’s a process that takes many, many years. If you are looking to build wealth for the long term, you should start investing as soon as possible.

Using an expert will help you decide how to invest your savings, but you should first have a firm handle of your short and long-term goals and needs. Therefore, before you meet with an investment adviser, broker or other investment professional, it’s a good idea to map out your financial goals.

Do you have children or grandchildren to marry off? Are your elderly parents in need of care? Do you need some supplemental income to make it through the month? You need to determine your own budgetary needs and your ability to tolerate risk first. Then, you should ask your adviser what kinds of investments would best fulfill these goals. Use your adviser as a sounding board. The adviser can tell you if your goals are realistic, and if not, you can work together to come up with objectives that can be achieved.

You have worked hard to save money, and it would be a shame to lose it on a dubious “get rich quick” scheme.

aaron@lighthousecapital.co.il
Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.