Ripped from the headlines—or just ripped off?

Posted by on September 22, 2011 @ 8:30 am in investing

Many of my fellow bloggers have written about the recent turmoil in the markets. Rather than add my two cents to what has already been very well articulated, I’d like to take a different angle.

Have you noticed anything different about the ads on the radio, on television, or in the papers lately? Not long ago, I heard a radio ad inviting listeners to attend a seminar sponsored by the author of a best-selling “how to” investment book. The ad promised that attendees would be able to “forget about diversification, avoid mutual funds, and eliminate 401(k) contributions.” Another ad played on fears by leading with a “Worried about America?” theme and encouraging readers to send for a report promising to identify the “one sure thing for the second half of 2011.”

I think most investors are appropriately skeptical of sales pitches like these. It’s the more subtle offers that sometimes get people in trouble. Many of them appeal more to human emotions than logic. This is especially true in the current economic environment, when many of us are under financial stress.

Think of some of the more outrageous scams in recent years. People often fall prey to what’s called the “social consensus” tactic. This type of approach tries to convince you that many people in your social circle have already invested in a particular scheme. You’re urged to invest in order to be part of the “winning” crowd, and you’re led to believe that time is short. (If you need a recent example, just think of Bernie Madoff.)

Even if you’re a natural skeptic and able to dismiss offers like these, there are some helpful tools to help you evaluate the multitude of “opportunities” that may come your way. Three very useful sources are the Risk Meter and Scam Meter tools sponsored by FINRA, the largest independent securities regulator in the United States, and the Securities and Exchange Commission’s Ask Questions brochure.

Do you play the skeptic? If you have your own “scam radar” or some other way to assess an investment’s risk, we’d love to hear from you.

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