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Editors Pick

How to Know If It’s A Ponzi Scheme

If it is too good to be true then it really isn’t true!

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Ponzi Scheme

A Ponzi scheme by definition is a version of fraud that rewards early investors with massive returns from the cash invested by newer investors. Ponzi schemes typically do not have underlying assets or enterprises upon which the investments are built, rather cash payouts are sustained from the contributions of investors who come later.

In this article, we will provide tips on how you can determine if you are about to invest in a Ponzi scheme or not.

The returns are astronomic

One of the most notable elements of a Ponzi scheme is that the returns investors get are astronomically high. A typical Ponzi scheme pays early investors as high as 20% monthly in returns. Based on this, perpetrators of Ponzi schemes promise early investors very high returns in the hope that the early investors will spread the “good news”, thereby inviting more contributors to the scheme. Once new contributors join the scheme, their money would be used to pay out high returns to older investors. Of course, investors/contributors to the scheme really do not care, so far they continue to get their returns along with the capital.

Returns are consistently high and steady

It’s almost impossible to see a business that guarantees the same return, come rain or sunshine. When someone tells you he will pay you 20% or 30% return monthly consistently and doesn’t break that promise, that should start to give you a cause for concern. It’s a bit ironic as no one expects not to be paid a return when they invest. But there are ups and downs in every business such that even if they do not post losses, the returns cannot continue to remain stable. If you do not see a bit of fluctuation, then you should start to ask questions. Investment schemes often invest their money in businesses or financial products which are often prone to the risks of an economic downturn, exchange rate fluctuation, inflation, etc. Anyone, who guarantees a steady payment of excessively high returns could be operating a Ponzi without you knowing.

No underlying asset or business

Ponzi schemes by nature do not have any underlying asset that the money is invested in. If you ask them what they use the money for, most early investors will usually sound discordant tunes. They speculate and can’t point specifically to what the money is used for. The reason for this, of course, is because there is hardly any business that pays as much as 20% in monthly returns, and so when they mention the business, you can easily deduce if it’s real or not. Ponzi creators know this is a problem and often come up with very grandiose business models that are often difficult to explain clearly.

They are not recognised by regulators

Ponzi schemes are also not recognised by regulators. Unlike most investment schemes such as mutual funds, pension funds, ETF’s etc., which are all recognised and regulated by the Security and Exchange Commission (SEC), Ponzi schemes do not have such oversight. As such, investors do not have any form of recourse, exposing them to the risk of losing their entire investment when the Ponzis collapse. When Ponzi schemes collapse, the bank balances are frozen completely.

It relies on new members to sustain the scheme

As mentioned above, Ponzis rely a lot on new members to sustain the model. That is the only way they can guarantee the consistent returns we mentioned above. Once the rate of growth of new members start to plummet, the likelihood of the Ponzi collapsing gets higher. Agreed, there are other business models out there that rely on new investors to grow but they are tightly regulated and the funds are tied to specific investments. Cooperatives, for example, are a bit like that which is why they are recognised by law and managed by a recognised governing board. Ponzis bear no such hallmarks.

It is often impossible to determine the asset value

Mutual funds, pension funds, ETF and even cooperatives all have asset values, known to contributors. You should be wary when you are approached to invest in a scheme and the perpetrators cannot show you the asset value of the scheme.

It relies on people’s greed and thirst for quick money

Whenever you see a business that attracts all and sundry, it typically has greed as the common thread. Everybody is a willing participant because of the greed for earning astronomical returns over a short period of time. Ponzi schemes attract all types of investors. From novices to savvy investors, rich and poor, everyone is looking to cash in.

Owners/creators of the scheme hardly advertise. They rely on word of mouth to spread the “good news”

Word of mouth is perhaps the most common selling point for Ponzis. They hardly advertise because, like we earlier stated, they cannot clearly explain what they are doing with their money. Most investment schemes such as mutual funds or pension funds, often advertise on TV, radio or in the pages of newspapers and will also offer prospectus detailing what they intend to invest your money in and what sort of returns to expect. They also clearly spell out the risks involved and the recourse in case the businesses goes bad. Ponzis have no such structure, so they rely on word of mouth and high returns to draw innocent investors in.

So, if you see a business that bears these hallmarks, try to apply extra due diligence and caution before investing your money.

A good description of a Ponzi Scheme. Source: Daily Mail

A good description of a Ponzi Scheme.
Source: Daily Mail


This article was first published on Nairametrics on September 17, 2016. 

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Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

4 Comments

4 Comments

  1. Anonymous

    September 18, 2016 at 11:31 am

    if they dont sell a product or proivde a service then its a scam, full stop

  2. Popsana Noble Barida

    December 3, 2016 at 9:16 am

    Nice article..
    Please correct the fourth point: “They are not recognized my regulators” should be “They are not recognized by regulators”
    You can remove this comment too..

  3. Anonymous

    May 1, 2017 at 2:28 pm

    Is Boonbuy Network a Scam ?

  4. Anonymous

    August 25, 2018 at 3:26 pm

    Hi Admin, any idea if porkmoney.com and their returns are legit i.e. not a ponzi scheme

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Currencies

DEVALUATION: CBN updates website to official rate of N360/$1

The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.

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CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.

The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1

Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.

The CBN has updated its website with the official exchange rate.

Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.

Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’

The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.

Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.

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Career tips

Investment options for salary earners

Investment options for the salary earners
#Investing #Entrepreneurs #Investment #Salary #Wages

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Investment options for salary earners - bank loan

Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.

Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

READ: Where to invest N500,000 right now

Get life insurance

Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.

[Read Also: Understanding the risks in bond investing]

Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

Prepare for financial emergencies

Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.

READ: SEC issues pre-notice on cancellation of certificates of 157 inactive CMOs

Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.

So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

[Read Also: Understanding the risks in bond investing]

Know your risk appetite

As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.

Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.

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READ: Here’s what will happen to Nigeria’s insurance sector in the short to medium term

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Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.

In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

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[Read Also: Important tips on how to profit in a bearish market]

Set your Investment objectives/goals

Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.

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READ: CBN debits banks N216.1 billion for CRR compliance

Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.

If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

[Read Also: I-Invest generates over N2 billion transaction in less than 6 months]

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Decide on asset allocation

Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

READ: How to build a profitable Mutual Fund Portfolio

It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

Decide on how to invest

There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.

[Read Also: How I Would Invest My Mother’s Retirement Funds]

It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.

This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

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