Be wary of overly attractive investments

This week I saw an ad on social media that said, "Invest with us and you'll get a guaranteed 35% annual return." I couldn't help but clutch my head. A word of advice: if you ever see an investment that's too attractive, be wary. As a basis for any investment, the higher the risk, the higher the return.

For reference: the historical return of the stock market is 10% annually, and we know it's one of the riskiest assets. It's by no means guaranteed: one year it will be -7% and the next, 13%. Well, how is it possible that the return on this investment was 35%, if it's also guaranteed (i.e., risk-free)? For example, banks offer less than 2% for guaranteed investments.

Throughout history, the vast majority of similar investments have turned out to be pyramid schemes. The operation is simple: as new members join the investment, their funds are used to compensate previous members. It all works until new members stop appearing, or old members want to recoup their initial investment and not just receive the interest generated. Also be suspicious if, instead of paying you the return, they tell you it's compounding (accumulating), making it more profitable to leave it invested.

They're right, as long as the funds actually exist. Don't think these scams only happen with small amounts. The biggest case in history involved Bernie Madoff, who orchestrated a Wall Street fraud worth $68 billion. For nearly 30 years, he was considered the world's most successful investor. But anyone could do that, since his profits were fictitious. In 2008, when the financial crisis hit, clients wanted to withdraw money that simply didn't exist. Madoff ended up sentenced to 150 years in prison.