How Can I Avoid Ponzi Schemes in 2021?

Jan 15, 2021

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It has been quite a busy one for us, but we are grateful. We wouldn’t be here without you.🤗

We devote Friday's newsletters to answering personal finance questions from our followers (or community members?)

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Hello MoneyAfrica,

Last year, I lost all my hard-earned money within a space of three months to a Ponzi scheme my friend introduced me to. It was a tough one on me but after much wailing, I picked up myself again. Please advise me on how to know and avoid Ponzi schemes in 2021.

-Temilola

Dear Temilola,

We're sorry about the losses you made in 2020 but we are glad you picked up yourself and starting all over again. So let's start from how the word 'Ponzi scheme' came about?

Ponzi schemes are named after a notorious fraudster, Charles Ponzi. He set up a scheme in 1919 promising returns of 50% in 45 days and a 100% return in 100 days. Eventually, the scheme crashed in 1920 and those who took part lost millions of dollars.

So here are few tips to help you in identifying a Ponzi scheme.

No real asset

A Ponzi scheme has no real asset. Nothing is being sold or bought. Money is simply being funnelled from new entrants to old entrants. You can’t explain it.

There are complex investments, no doubt.

However, there must be a way to explain an investment no matter how complex it is.

If you can’t explain the investment to a young child, you either do not understand it well enough, or it is dodgy or too good to be true.

No matter how talented an investment manager is, they will always sound a note of caution. Past performance is no guarantee of the same in the future.

In any investment you make, your target should be to either exceed inflation or at the very least be at par with inflation. In Nigeria, inflation is 14.89% as of November 2020.

When someone tells you, they will deliver returns 2 or 3 times the inflation rate, EVERY MONTH. Be terrified.

No documentation

Ponzi schemes have little or no documentation. You never get to know the management. You see communities, but no one can really tell you anything about the scheme.

No way to measure returns

A Ponzi scheme has no way of measuring returns or performance. All people say is that you can make a certain amount. Sometimes, people just tell you how long the scheme has been in existence. These schemes literally spring out of the air.

At the end of the day, your goal should be to build lasting and sustainable wealth, but definitely not through quick gains. Don't invest in what you don’t understand.

Hi Team MoneyAfrica,

I have a question: If you have an insignificant amount of money eh, and you're looking for what to do with it, would you pay to learn a new skill or start a business? Amount is small o, like ₦40k.

- Mamah

Hi Mamah,

Either of them would work. What's important, though, is playing to your strength. No amount is small, especially for personal development.

Hi MoneyAfrica,

Please, are there investment options for as little as ₦10,000. If yes, kindly share some ideas.

-Lola

Hi Lola,

One of the greatest misconceptions people have in personal finance is that some amounts are too little to invest or investment is something rich people do, especially those with loads of money they don’t need.

That’s far from the truth! There is never anything such as money that’s not needed. Every naira can be put to use.

There are basically two ways to invest money: You can spread it across a basket of assets every month, or you can decide to invest in one particular asset, till you have a significant holding.

You can invest in a mutual fund, savings bond or even equities for as little as ₦10,000 but you need to note that your choice is dependent on your risk appetite, investment duration, goal and age.

But it is possible to invest as little as ₦10,000. We hope you found this helpful.

This is where we'll draw our money curtains for the day.

A new year is a great time to start to document your financial journey. If you would like to do so, you can order our Personal Finance Guide for N6,500

Have a lovely weekend.

With Love,

MoneyAfrica Team💚

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