It’s no secret that the financial world is full of scammers and manipulators, looking to take advantage of everyday investors. In fact, it seems like every other day there’s a new story in the news about some shady deal or investment scam.
But what you may not know is that many of these scams are actually quite sophisticated, and can be difficult to spot if you’re not familiar with the warning signs, which I commonly refer to as financial porn.
I’ve already talked about financial porn before and how one can break their addiction to it. If you’re interested in that, you can check that out here.
In this post, however, I’ll be focusing more on the types of manipulation tactics that these fake financial ‘gurus’ use to suck people in, and how you can avoid falling victim to them.
Here are 6 things to look out for:
1. Promises of Easy Money
This is perhaps the most common form of financial porn.
It’s the promise that you can get rich quick with little to no effort.
There are all sorts of variations on this theme, but they all boil down to the same thing: someone is trying to sell you a get-rich-quick scheme.
You might hear things like :
- “You can make a fortune by day trading penny stocks!”
- “I turned $1,000 into $1 million in just 12 months with this simple strategy!”
- “I know a guy who made $10 million in the stock market last year and he’s going to share his secrets with you!”
The key to identifying if these claims are legitimate or not, is to understand what’s involved with creating these results with these different strategies. For example, those previously mentioned results are really only possible if you utilise leverage (i.e. borrow large sums of money to invest/trade), or if you already have a large pool of starting capital.
Usually, anything that promises more than 30% per annum returns is something that should raise a red flag. The most successful fund manager on the planet Jim Simons achieves a 39.1% average net return using algorithmic trading (1988-2018), and the famed Warren Buffet achieves 20.1% returns on average from 1965-2021 without leverage. So if someone is promising you 100% or 1000% returns, it’s very likely financial porn.
This is when financial porn takes a more subtle approach.
Instead of making bold promises, it uses fear, urgency, or other emotions to get you to act.
For example, you might see headlines like :
- “For serious investors only – only 10 properties left!”
- “Inflation is out of control! You need to buy gold right away!”
- “The government is going to confiscate your retirement savings! Move your money to this hidden account now!”
Look out for these types of headlines, as they’re usually designed to get you to act on the spot without thinking at the end of a presentation.
3. Exaggerated Claims
The language of financial porn is often a dramatic exaggeration of the facts.
For example, a stock that has some promise will marketed as:
- having “explosive growth” or
- being the “next Facebook”
Or, a financial product that has some benefits will be described as
- having “guaranteed returns” or
- being “risk-free”
In reality, nothing is ever guaranteed, and there’s always risk involved – no matter what the investment.
4. Misleading Graphics
Financial porn often uses misleading graphics to make things look better than they really are.
For example, you might see a chart of a stock that’s going up and to the right, with no mention of the fact that it’s down 50% from its all-time high. Or, you might see a graph that shows the potential returns of an investment, but doesn’t mention the risks.
These types of misleading graphics are designed to make you believe that an investment is better than it really is.
5. Complicated Jargon
Finally, be wary of anyone who’s using complicated jargon to explain their investment strategy.
If you don’t understand what they’re talking about, chances are they’re just trying to confuse you. They might be using jargon to mask the fact that their strategy is actually very risky.
The world of investing and trading is a complicated one, but once you understand it, it’s actually quite simple. A good educator that has your best interests will do their best to simplify it for you so you can make informed decisions.
6. Fake Testimonials
Testimonials are often used in financial porn to create a false sense of legitimacy.
For example, you might see a testimonial from someone who claims to have made a fortune with a certain stock-picking system. Or someone who found the quality of education to be worth the high price tag of a financial course.
The problem is, it’s not always easy to tell whether they’re real or fake. Sometimes the people featured in those “testimonials” are paid actors, and sometimes the people are legitimate students who haven’t actually made any money from what they learned yet (i.e. they’ve just attended a free, hype-filled information session filled and are very excited at the time of recording).
A good way to check is to see whether they’ve included the students’ full name, where they’re from and what they do. Make sure that there’s context and an actual personal story rather than a generic “before I was bad, and now I was good” type testimonial. And, without infringing anyone’s privacy, try and look them up on social media to see if you can verify their story.
If you want a better idea of what genuine testimonials look like, you can check out our testimonials here.
Financial porn is all around us, and it’s important to be able to spot it. By being aware of the signs, you can protect yourself from making bad investment decisions.
And, if you’re ever tempted by financial porn, remember that there’s no such thing as a guaranteed return or a risk-free investment. So always be sure to do your own research before making any decisions.