My original intention was to come up with a list of investment scams that have occurred in Australia over the last decade or so, but I got a little sidetracked. Here’s why.
When I decided to write this article, I jumped online to do a little Googling. When I typed in ‘Dodgy investments in Australia’ one of the ads at the top of the page promoted ‘850%+ Investment Returns!’ They also claimed ‘Recession Proof Products’.
I pondered a couple of things. First of all, if I was paying to have my financial investment firm advertised on Google, I would be really, really disappointed if I appeared at the top of that particular search. Second, if I could invest $100,000 and get $850,000 return in one year, I probably wouldn’t bother advertising at all – in fact I probably wouldn’t be working other than to manage my own stunningly successful investments.
Here are a few calculations to highlight the point. If I invest $10,000 with 850% return, I will have $95,000 in one year. If I reinvest that money, it will be $902,500 after the second year; $8,573,750 after year three; $81,450,625 after four years and $773,780,937.50 after the end of five years. Invest for seven years and you’ll have almost $70 billion dollars!
For a ten thousand dollar initial investment.
It’s surprising that when a psychic says they can see the future, most people’s reaction is, “Why don’t you pick the winning lottery numbers every week then?” Yet when an investment ‘expert’ offers returns that are similarly unbelievable, far too many people think, “Where do I sign?”
So what is a realistic investment return? Historically, markets tend to increase by around 7% per year, allowing for inflation. A good investment portfolio may double that rate without too much risk, but anything more than 14-15% and you need to keep reminding yourself that increased profit comes with increased risk. So when someone starts promising over 850% returns without any risk, your ‘male cow manure’ detector should really be kicking into high gear!
There have been several high-profile investment scams in Australia – tree plantations and a variety of property investment ‘opportunities’ spring to mind – but considering only past rip-offs could leave you open to buying into some new, previously untried scam. The best thing to do is keep a healthy level of scepticism towards investment opportunities and always consider getting a second opinion on any investment, but especially on any investment that offers unrealistic returns.