Small Change

Better safe than sorry: Resist urge to invest in too-good-to-be-true schemes

Resist urge to invest in too-good-to-be-true schemes that promise unsustainable returns

It sounds like a surefire winner - buy plots of cheap land overseas and get your money back, plus a tidy profit once they are sold off to developers.

Or this one: Buy agarwood trees that would eventually be harvested for their valuable timber and oud oil that is used in fragrances and spas.

Yet another is a so-called oil bunkering scheme that probably had nothing to do with oil. It was sold as a financing arrangement with promises of high, regular payouts and capital back after a specified period that could be as short as eight months.

And in another investment scheme that turned sour, retail investors were persuaded to park their hard-earned savings with financial experts who would trade stocks or forex on their behalf.

Besides the above, several firms, including Genneva Gold, Gold Guarantee, Profitable Plots and Sunshine Empire, have surfaced in recent years at the shady end of the Singapore financial service sector.


ST ILLUSTRATION: MIEL

All these schemes were offered with low initial investment sums and attractive returns over short periods.

But big losses can also come with the territory, as many Singaporeans can attest.

It is vital to recognise that financial losses affect us differently. This can be attributed to our emotional make-up, the resources at hand to make money again and how deep our pockets are. While some are able to withstand great volatility and still sleep well at night, others are risk-averse.

The uncertainty and high risks of such schemes seem obvious, yet many here come a cropper when their investments in these schemes turn sour.

The increasing number of retail investors caught out and the millions of dollars lost have caught the attention of the authorities.

A "Beware! Investment Scams" programme organised by MoneySense and the Securities Investors Association Singapore was launched last month to alert investors about the pitfalls of too-good-to-be-true schemes.

The authorities in the United States, Canada and other jurisdictions have also warned of the risks involved in fraudulent binary option trading, reflecting a growing worldwide problem.

In a nutshell, a binary option is a type of option contract that references an underlying instrument such as shares and currencies, where the payout will depend entirely on the outcome of a "yes or no" (binary) proposition.

When the binary option expires, you will receive a predetermined cash payout if you have predicted correctly. If not, you lose your entire investment.

Several victims of these schemes told The Sunday Times that they got greedy in their hunt for yield amid a period of low interest rates.

As their stories below attest, the scams - and the related dangers - come in all shapes but there are common elements as well.

One ruse, as investors have found out the painful way, is to ensure that those who got into a scheme early broke even in a short period of time, so as to encourage them to pile in more money in a bid to earn bigger returns.

Such investment scams are usually managed by people who hold meetings in posh offices and hotels, which boosts their public image and lend credence to their products.

Some investments appear to provide some form of insurance, which investors wrongly believed could protect their capital.

Many of these investors then invited family members and friends to participate, partly because there are commissions to be earned when they refer fresh candidates and partly because they truly believed the schemes were bona fide.

UNDERSTANDING YOUR RISK PROFILE

We all hate to make a loss and the feeling is worse if you had been duped into a scam.

It is vital to recognise that financial losses affect us differently. This can be attributed to our emotional make-up, the resources at hand to make money again and how deep our pockets are.

And while some are able to withstand great volatility and still sleep well at night, others are risk-averse.

If you are risk-averse, it means that even if the investment loss is small, it can be an emotionally draining experience that may impact your health.

It is prudent to understand your risk profile. So besides analysing the risk-reward reality and conducting due diligence before any investment, ask yourself : Can I take the volatility, can I afford to invest, and, finally, do I need to invest?

One 55-year-old investor who put almost $40,000 into an oil bunkering scheme, expecting 15 per cent monthly returns over eight months, recalled how stressful the experience had been for her. In her case, her nightmare began after receiving just two payouts.

When the payouts dried up, dark thoughts consumed her mind and she went through an emotional roller coaster with feelings of anger, rage and depression, and countless sleepless nights. She also despaired as it was a friend who had referred her to the scheme.

She was subsequently diagnosed with Stage 2 breast cancer. After surgery and six weeks of radiotherapy, she counted herself fortunate that her condition has stabilised and she is on a five-year anti-hormonal pills regime.

INVESTING WITH MONEY YOU CAN AFFORD TO LOSE

A 45-year-old investor borrowed $400,000 from a credit line as the principal sum for her investment in a scheme. When the scheme collapsed, the monthly interest portion of the debt was a staggering $8,000, which devastated her.

Another took a loan from his 25-year endowment insurance plan to fund an investment. If he had not taken the loan against the policy, the potential maturity proceeds would have been about $100,000 when it matured last year.

Instead, his maturity proceeds were just $20,000. This means that the premiums he had saved in his insurance policy for the past 25 years had gone down the drain.

ONCE BITTEN BUT NOT TWICE SHY

The adage "once bitten twice shy" does not hold true for some retail investors. One medical doctor admitted to me that he had lost his money twice to schemes that turned out to be run in a Ponzi-like manner.

In a Ponzi scheme, people are enticed into investing by the promise of high returns. The returns, however, are paid out of funds from new investors entering the scheme. It all goes swimmingly until the flow of funds dries up when the operator is unable to get enough new investors to pay off the older ones, and he flees with the money.

Another investor in her 60s had parked more than $500,000 in binary options but has not been able to withdraw any returns nor her capital.

To make matters worse, she lost more money when she tried to retrieve her money through an overseas agency that claimed to have helped other binary option investors trapped like her.

In her bid to recover her retirement savings, she had responded to an individual who claimed to work for an international police agency who linked her up with a hacker.

She forked out $10,000 on the hacking software but nothing has materialised. In addition, she is considering legal help from the US but has been told to pay a high initial fee.

BACK TO BASICS

A former classmate has been encouraging me to sign up for an overseas-based scheme where so-called professional traders will deal in blue-chip US stocks on my behalf. It is not regulated by the Monetary Authority of Singapore.

The initial investment sum is US$10,000 (S$14,035) and my friend claimed the trades have made him richer by achieving about 7 per cent monthly net returns.

He also earns commissions by referring investors to the scheme; his parents and siblings have joined.

I declined his invitation to invest.

For me, it's back to the basics of disciplined saving, making prudent investments steadily and preserving my wealth.

I used to get very excited when I heard of investments with potential high returns.

Over the years, I have learnt to protect myself by inculcating a habit of working out the worst-case scenario. I also ask myself before making any investment if I really need to take the risk.

Better safe than sorry.

A version of this article appeared in the print edition of The Sunday Times on May 07, 2017, with the headline 'Better safe than sorry'. Print Edition | Subscribe