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Thoughts on Internet Investing Scams and How to Avoid Them

I’m one of the internet’s biggest fans. I love that you can use it to find useful knowledge and you can just chill with it. I love trivia, which probably helps.

Unfortunately, there’s a lot of misinformation out there, whether on government conspiracies, medical issues, or investing. The latter can be particularly dangerous to those looking to learn about investing.

How I avoid internet investing scams:

I have a strategy in place ahead of time. I know my plan for how I want to invest and I knew my reasons behind it. I have long-term and short-term goals for where I want the money to go (though not much is going into investing, more is going to deb-repayment). As regular readers know, I like index funds and plan to do a fairly simple portfolio of indexes eventually.

It’s tempting to want to get rich, but I know the reasons I like index funds, I know that I trust investing in them more than I trust my ability to pick a good single stock. I’ve researched them and actually feel confident about my decision.

So whether I’m using Stumble Upon and read a hot tip or whether some blogger recommends it, the information doesn’t register, I just skip over it. I’m set on my plan.

If you’re feeling the pull of some exciting opportunity, be sure to take time to figure it out. The SEC has a long page on various types of investing fraud one finds online.

Some examples include:

The “Pump And Dump” Scam

It’s common to see messages posted online that urge readers to buy a stock quickly or tell you to sell before the price goes down. Often the writers will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks. In reality, they may be insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by gullible investors. Once these fraudsters sell their shares and stop hyping the stock, the price typically falls and investors lose their money. Fraudsters frequently use this ploy with small, thinly-traded companies because it’s easier to manipulate a stock when there’s little or no information available about the company.

I think that one’s particularly common with “penny” stocks, those under $1.

The “Risk-Free” Fraud

“Exciting, Low-Risk Investment Opportunities” to participate in exotic-sounding investments – such as wireless cable projects, prime bank securities, and eel farms – have been offered through the Internet. But no investment is risk-free. And sometimes the investment products touted do not even exist – they’re merely scams. Be wary of opportunities that promise spectacular profits or “guaranteed” returns. If the deal sounds too good to be true, then it probably is.

If it was really risk-free, it wouldn’t have very good returns. CDs and the like carry much lower risk (though not completely risk free). You’d do much better investing with them if you want to minimize risk. Or index funds if you want higher returns.

I’m a Bogle-gal, I like the indexing model and I’m fond of Vanguard. Sometimes getting attached to an idea can cost us money. Scammers play on that reality and try to convince us that this is one of those times. But it’s probably not.

So consider your investing plans, find a strategy. That’ll provide one layer of defense against the onslaught of misinformation.

For some other thoughts on investing issues, Debt Kid posted about 5 Common and Deadly Investing Mistakes, Pinyo invested in vending machines without having any idea of a proper business model, Ana at Debt-FREE Revolution shares a common newbie investing mistake she and her husband made. While Randall wasn’t technically investing, I was struck by the similarities in his story about how, he fell for a sales pitch without researching it and now regrets the mistake.

Do you find stock tips tempting?


{ 5 comments… read them below or add one }

Debt Free Revolution March 16, 2008 at 4:27 pm

Thanks for the link, and I think right now there’s a LOT of folks trying to make the same mistake hubby and I almost did.

Aaron Stroud March 16, 2008 at 5:15 pm

Larry Swedroe tells a great joke about economists that is directly applicable to investing.

Two guys are walking down the street. One of them points out a $20 bill lying on the ground. The other guy, an economist, says ‘don’t waste your time. If that was really a $20 bill, someone would have picked it up already.’

The morale is the odds of you finding a bargain first are extremely slim, so don’t waste your time looking for them. You’d have to beat the intelligence and combined research of millions of investors and that’s not going to happen consistently.

mrsmicah March 16, 2008 at 5:27 pm

Thanks for sharing that joke, Aaron. 🙂 I hadn’t heard it before, but I love it!

Dad March 16, 2008 at 7:17 pm

Excellent points! I’ve known a number of people who tried to beat the market in normal ways and made less than most funds do. Scams make it much worse. You quoted the SEC’s most valuable piece of advice. If it sounds too good to be true, it probably is.

Pinyo March 17, 2008 at 11:17 am

Great information. I throw away all the investment tips and hot stocks junk mails that I get at home. I am a believer of indexing myself.

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