I am an investment expert. Here are four ways to determine if a promising opportunity is a SCAM

Investment scams are not nearly as common as coercive payments, but the amounts lost are enormous in comparison.

Police figures for the past three years reveal that victims lost an average of £26,773.

Victoria Hasler, head of fund research at Hargreaves Lansdown, explains how you can avoid being trapped by heartless fraudsters looking to plunder your investments.

Remember how your grandma always told you that if something seems too good to be true, it probably is?

You would do well to also apply this advice to investments.

Advertisements that promise seductively high returns, guaranteed returns or linear returns make us very nervous. Why? Because it could be a scam.

Here are four key clues to look for to check if an investment is too good to be true.

1. Investments that promise returns that are higher than historical averages

Investment returns will vary over time, with some years being better than others.

However, we recommend that you be cautious if someone tells you that you can achieve much higher returns than the historical average over the long term.

But what is too good to be true? We have calculated the annualized return over 20 years for a number of assets below.

If you are presented with an investment and told that it can yield a much higher return than this one, you may want to ask yourself why.

We’re not saying it’s impossible to get more than history suggests, but higher returns usually compensate for more risk.

You also don’t have to panic if your investments yield much more or less than these returns in a given year.

Keep in mind that these are averages over twenty-year periods and returns will likely be higher or lower for each year.

Source: Lipper IM until 30/09/24

Ask where exactly your money is invested and then view the returns below.

For stocks, you can expect a return of about 7-10 percent per year over the long term.

Technology returns have been very high in recent years, distorting the long-term average for the sector, but we don’t necessarily expect this to continue for years to come.

This has also distorted US returns somewhat, as the US market is quite tech-heavy.

If you invest in bonds, you can probably expect a return of somewhere in the neighborhood of 3 to 5 percent per year.

If rates fall, we might get a few better years for bonds, but again, don’t expect this to last forever.

If you invest elsewhere, comparisons become a little more difficult. Gold has had a good run lately, returning 618 percent over the past two decades.

Again, we don’t necessarily expect this to stay that way, so be a little cautious here.

As for investment providers who claim they will try not to lose you money in the long term, you can compare their returns with the Investment Association’s Absolute Return sector.

Funds in this sector will still rise and fall in value and may lose money over shorter periods of time, but are invested in such a way that they attempt to maintain their value over the longer term.

This sector is a bit newer than some others, so we looked at returns over the past ten years instead.

2. Investments with promised or guaranteed returns

In this world, nothing can be considered certain except death and taxes. That’s what one of the founding fathers of the US, Benjamin Franklin, said.

He was referring to the US Constitution, but he might as well have been talking about investments.

This one is easy: if someone is absolutely rock solid and guarantees you a return from something other than cash, my advice would be to politely decline and run in the opposite direction as quickly as possible.

Victoria Hasler: If someone guarantees you anything other than cash, politely decline and run the other way

Investing compensates you for taking risks. They are not guaranteed.

The closest you get is putting money in the bank (as long as you don’t exceed the £85,000 limit that the government ‘guarantees’, as long as the bank is solvent).

Even government bonds have been known to go bankrupt. Investments are not guaranteed.

3. A journey that goes too smoothly

A much-maligned phrase that constantly appears in compliance alerts is: Your investments can go down as well as up in value.

However, I’d almost be tempted to change that line and say that your investments should fall in value as well as rise.

Of course, we all hope that our investments will rise in the longer term, and if you choose your investments wisely, history suggests that this will happen.

However, this will never happen in a straight line. View the historical return chart for the investment you are considering.

Does the line go straight or almost straight up? Markets experience ups and downs, and your investments will too.

If the return profile seems too good to be true, it probably is. In the illustrative diagram below, Investment A may look attractive, but the path of Investment B is a lot more realistic.

There are some investment schemes that artificially smooth out returns to deliberately give investors a better journey (think ‘profits’ funds for example), but these are few and far between.

If the line looks smooth, try to understand why, and if you have doubts, skip and move on to the next investment option.

4. Ridiculously complicated investments

One of the rules to strictly follow when investing is: don’t invest in something terribly complicated if you can achieve the same result with something simple.

The problem is that if you don’t understand an investment, it is very difficult to determine whether it is legitimate or a scam.

Does this rule mean that you will miss out on some good investments every now and then? Yes.

Does this mean you’ll also miss some terrible blowouts and scams? You bet.

Scammers often want to present very complicated investment strategies, assuming that you will think they are very smart (and probably feel a little stupid yourself).

Ask them to explain it in language you understand. If they can’t, walk away.

Scammers are becoming more and more sophisticated and it can sometimes be quite difficult to distinguish a scam from a legitimate investment.

Always take your time when looking at investments. Don’t let anyone pressure you into making quick decisions with temporary deals.

And if you’re ever unsure whether investment returns sound too good to be true, we highly recommend seeking advice. It’s better to be safe than sorry.

DIY INVESTMENT PLATFORMS

A.J. Bell

A.J. Bell

Easy investing and ready-made portfolios

Hargreaves Lansdown

Hargreaves Lansdown

Free fund trading and investment ideas

interactive investor

interactive investor

Invest for a fixed amount from € 4.99 per month

Sax

Sax

Get £200 back in trading fees

Trade 212

Trade 212

Free trading and no account fees

Affiliate links: If you purchase a product, This is Money may earn a commission. These deals have been chosen by our editors because we believe they are worth highlighting. This does not affect our editorial independence.

Compare the best investment account for you