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Many of us are tempted by the success stories of friends and relatives to jump on the bandwagon, only to be disappointed later. It's important to remember that investment products as such are not good or bad. One size does not fit all.
An investment plan that works for someone else may not work for you.
This brings me to the Ponzi scheme concept, which is often made popular in social circles.
A Ponzi scheme is an investment scam that pays existing investors out of money invested by new investors, giving the appearance of earnings and profits where actually there are none. Ponzi schemes are also known as pyramid schemes.
The scheme is based on recruiting an ever-increasing number of "investors".
But what are the signs of a pyramid scheme?
- Upfront investment:It is the main source of income, theoretically, not the product being sold. That is only a smoke screen for the scheme.
- Signing people up: Unless you get hired on for a salary or an hourly wage, this will be a pyramid scheme. The more people you sign up, the more money you make.
- Making a commission off the work of others:The pyramid part starts when you make money off the sales of friends of friends.
- Empty offices: If you walk in the door and there are a bunch of people your age in chairs with clipboards, a plant on the floor, and a framed picture on the wall, it would be better to leave.
- Be mindful of "too-good-to-be-true" promises. Rather think long and hard before depositing money into unregulated investment opportunities. There is no such thing as risk-free "get-rich-quick" schemes.
- Your friends and family may offer you investment advice, but be wary of basing your decisions on storytelling shared around social circles.
- Sekese is a certified financial planner professional and member of the Financial Planning Institute.
- Visit www.fpi.co.za