Larger than normal returns must warn you

Many people are exposed to get-richquick schemes the world over. South Africa, in particular, has seen a lot of such money-making schemes over the past few decades.

The appetite for investment opportunities that promise “high returns” remains high, and anything that can meet this insatiable demand will definitely find buyers.

With a lack of enforcement of regulation, schemes where the potential to make money is deemed very high have evolved. Some are pyramids, and others use goods and services to lure unsuspecting investors. Some sell cosmetics, some sell services, and they are sometimes called “multi-level marketing”.

The marketers of these schemes aggressively defend them as not being pyramid schemes.

Pyramid scheme members at the top benefit the most and those nearer the bottom only benefit after top members have been paid.

New members must be recruited to ensure existing members are paid and this is the main source of income rather than value created from a product or investment. When new members can no longer be recruited fast enough, the scheme inevitably collapses.

It is good to be able to differentiate between an investment and a pyramid scheme. Quick and huge returns are more appealing than the prospect of making long-term returns, but while you may perceive one of these schemes as the shortest route to wealth, they could in fact cost you all your money.

Bigger than normal returns is one way to identify a pyramid scheme. It may offer as much as 5% per day, or 30% per month.

As a general principle, a product that offers returns above 30% a year is abnormal and, therefore, is a pyramid scheme.

The lack of regulation in this space means promoters do as they please when setting expected returns, and there are no legal consequences when the scheme fails and investors lose their money.

You will only be guaranteed a return on any legitimate investment monitored by the Financial Sector Conduct Authority (formerly the Financial Services Board), if it is a fixed income one.

Banks usually do this quite well – their 60-day notice deposits are an example. Government retail bonds also guarantee fixed returns on certain amounts over a certain period.

Other investments such as shares and unit trusts, for example, do not