If It Sounds too Good to Be True, You Can Bet That It Is

A recent article in the Washington Post, “Children’s Charity Victim of Ponzi Scheme,” caught my eye. Looking to protect its endowment in 2008’s difficult market, the DC-based Hillcrest Children’s Center invested in what Garfield Taylor of Gibraltar Asset Management Group described as a “can’t lose” investment strategy. By mid 2009, the $8 million Hillcrest invested had evaporated in a Ponzi scheme, severely compromising their ability to help orphans and families in need.

Stephen L. Cohen, an SEC official, notes in the piece that this sad story should serve as a reminder to investors. “There really isn’t any such thing as an investment that has zero risk with a high reward,” Cohen said. I wrote an article “A Tragic Case of Misplaced Trust” in the wake of Bernie Madoff’s crimes that outlines steps investors should take to protect themselves. Briefly, investors should choose to work with an independent Registered Investment Advisor who is bound by a fiduciary duty to clients and who uses an independent custodian. Also, it’s crucial not to put all your eggs in one basket and to understand what you invest in.

Above all, however, question the impossible. When an investment manager claims to always beat the market, be skeptical. Simply, when evaluating potential investments, remember the old adage: “If it sounds too good to be true, it probably is.”