How to Spot a Stock Scam

Bernie Madoff is old news. Every day seems to bring a new scam in the investing world. 

In Toronto, mogul Weizhen Tang -- the self-proclaimed "Chinese Warren Buffett" -- allegedly promised his investors that they'd earn 1% weekly. He's now under investigation by U.S. and Canadian officials, after some investors claimed they had difficulty withdrawing their money from his funds. (As of early April 2009, Tang denied any wrongdoing.)

Tang's alleged promise seemed odd when compared to the enticement of loftier returns -- until I realized that 1% per week seems low. I bet that conservative, reasonable figure was safe-sounding enough to lure in many investors who might otherwise have been more skeptical. But as modest as 1%-a-week returns seem, remember that these days, many bank accounts are paying 1% per year. At 1% per week, your money might enjoy something like 68% growth in a single year -- and multiply 100-fold in roughly nine years. See how wildly over-the-top that promise can be?

For perspective's sake, here are the long-term growth rates of some of the very best stock market performers. These figures represent the upper limits of the sort of returns you can reasonably expect over the long haul:

Data: Yahoo! Finance.
*19-year average.

CDs that can't deliver
Some potential portfolio perils can be even more subtle. CDs based in other nations have recently attracted many investors' attention by offering steep interest rates. As I type this, domestic one-year CDs are averaging 2.35%. But people searching online for better rates are finding 6.5% and more abroad. I even read about a 90-day Mexico-based CD paying 12%.

But you have to think twice before investing in such vehicles. For one thing, they're not issued by banks insured by the FDIC, which means you won't get any sort of protection if that bank goes bust. Some international CDs may work out well for investors, particularly if they're from major, established institutions. But on the whole, they're far riskier than U.S.-based CDs.

If you're willing to stomach a reasonable amount of risk, dividend-paying stocks might be your best best for investments that'll offer both income and growth. At least there, you'll have a better idea of what you're getting into.