Avoid Kris Humphries' Financial Fate: Don't Fall for Investment Scammers

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Don't Become Another Kris Humphries -- Hang On To Your MoneyKris Humphries may be mourning the death of his brief marriage to Kim Kardashian, but that may not be the only thing he has lost recently. It appears he may have been the victim of financial fraud, losing perhaps several hundred thousand dollars. His case serves as a handy reminder for all of us to be careful, lest we get taken to the cleaners ourselves.

Too Good to Be True

Humphries would have done well to remember that investing propositions that seem too good to be true usually are. A fellow named Andrey Hicks, who attended the NBA player's wedding, has been arrested following an investigation by the Securities and Exchange Commission. It appears that, claiming to have a Ph.D. from Harvard (and also, appropriately, a B.S.), he inspired a handful of investors to give him a total of $1.7 million. Hicks claimed to have developed a way to earn annual returns of nearly 80% via high-speed trading robots.

The SEC reports that Hicks actually flunked out of Harvard twice. And when it comes to returns of 80% annually, well ... that's just not a realistic expectation. Even 20% annual returns over long periods are reserved for truly top-performing investors who've proven their talent over decades.

Common Scams

If Humphries has indeed been scammed, he was likely targeted because of his wealth and fame. We not-so-rich and not-so-famous folks can be targets, too, though. Here are some scams and dangers to watch out for:
  • The hyping of penny stocks: Penny stocks are those that trade for less than about $5 per share. They're typically tied to small, unproven companies without track records of rising revenue and earnings. They're also easily manipulated because of their size. Unscrupulous sorts will "pump and dump" them: They'll buy shares for themselves, and then will hype the stocks, often with promises of sure-fire profits from discoveries of gold or oil, or cures for cancer. After excited people buy shares, driving up the stock price, the hypesters sell and profit, sending the shares down as they sell. Ouch.
  • Come-ons by folks with faked credentials: Even qualified and regulated advisors can do you wrong on occasion, but you're at extra risk if you're doing business with a faker. You can look up brokers and brokerages at the Financial Industry Regulatory Agency and the SEC offers more tips on checking out financial advisors and others. You might inquire about someone who approaches you by checking them out through your state's regulatory office, as well.
  • Currency and foreign exchange arrangements: Many people are getting into currency/"Forex" trading without realizing how risky it can be. Worse still, some get involved via promoters who make big bucks charging commissions per trade -- or who just take their money and run, as Hicks allegedly did with Humphries' funds. These are often Ponzi schemes, which might soon be referred to as Madoff schemes.
  • Investment "seminars": Older people in particular are often lured to these via offers of free lunches or dinners. Here they're often urged to buy into investments that are not their best options, such as variable annuities or reverse mortgages.
Be Psychology-Aware

The reason that so many people fall for financial scams is tied to psychology. Most of us want to trust most people, most of the time. When someone seems to be telling us the truth, and is offering us something attractive, we don't want to think that they may be lying or may have less-than-honorable plans.
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We are also ruled by fear and greed, and scammers make the most of that. They know that we'd love to have more money, and are interested in lucrative proposals. They also know that many of us are worried about not having enough money for retirement. They prey on our fear, dangling attractive and easy solutions to our problems.

Protect yourself by being skeptical of any investment opportunity that's presented to you. Be wary of appeals to your emotions, and to any "guaranteed" returns, especially steep ones. If anyone pressures you to act quickly, run the other way.

Remember that most terrific investments -- such as dividend-paying stock in healthy and growing companies, or mutual funds with strong track records -- don't have to go trolling for buyers. Arm yourself with knowledge about effective investing and seek out great returns on your own -- you're far less likely to get taken to the cleaners that way.
Gather more tips on how to protect yourself:
Longtime Motley Fool contributor Selena Maranjian appreciates your comments.
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