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"High Yields" and Hot Air

April 11, 2005

We've all seen investment offers that promise to pay sky-high returns for what are at best extremely risky propositions — and at worst are pure frauds. Here's a list of red flags that we often find in many of the frauds we see.

  • If it sounds too good to be true, it is. Mom was right! Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you'll get substantially more could be highly risky. And that means you might lose money.
  • "Guaranteed returns" aren't. Every investment carries some degree of risk, and the level of risk typically correlates with the return you can expect to receive. Low risk generally means low yields, and high yields typically involve high risk. If your money is perfectly safe, you'll most likely get a low return. High returns represent potential rewards for folks who are willing to take big risks. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are "guaranteed" or "can't miss." Don't believe it.
  • Check out the company before you invest. If you've never heard of a company, broker, or adviser, spend some time checking them out before you invest. Most public companies make electronic filings with the SEC. There are computerized databases to check out brokers and advisers. Your state securities regulator may have additional information. And by the way — if a supposedly upright firm only lists a P.O. box, you'll want to do a lot of work before sending your money!
  • If it is that good, it will wait. Scam artists usually try to create a sense of urgency — implying that if you don't act now, you'll miss out on a fabulous opportunity. But savvy investors take time to do their homework before investing. If you're being pressured to invest, especially if it is a once-in-a-lifetime, too-good-to-be-true opportunity that "just can't miss," just say "no." Your wallet will thank you.
  • Understand your investments. Fraudsters frequently use a lot of big words and technical-sounding phrases to impress you. But have faith in yourself! If you don't understand an investment, don't buy it. If a salesman isn't able to explain a concept clearly enough for you to understand, it isn't your fault. Don't make it your problem by buying!
  • Beauty isn't everything. Don't be fooled by a pretty website — they are remarkably easy to create. If you'd like to see what an online fraud looks like, click here.

Remember — an educated investor is our best defense against fraud! For more information on how to invest wisely and avoid fraud, please visit the Investor Information section of our website.

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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