Madoff Lessons

While no PINK readers might have been hit directly by the extra-ordinary fraud Bernard Madoff perpetuated, we can all learn investing lessons from this mess.

1. Diversification saves you. The S&P 500 might be down 40 percent this year, but it WILL eventually recover. A stock fund hit challenges you emotionally and financially. If you are concentrated on anything, however, you run the very real risk that what you lose may never be recovered. Shockingly, Madoff had so fooled his investors that they often invested significant portions of their wealth with him. That money is NEVER coming back.

2. No single investment is perfect. Now, in retrospect, Madoff’s always-up, never-down returns seem fraudulent on their face, but sophisticated investors were fooled. Foolishness at the time appeared prudent: who wouldn’t stick with a manager who keeps making them money? Lesson: stay cynical, keep asking questions and confirming even good investments.

3. Anything secret is suspect. Several years ago, some of my clients were “invited” to discuss a super-secret-special way to avoid capital gains taxes. Today, the once-prominent tax and law firms who promoted this scheme (and made would-be investors sign a letter of secrecy) are in jail. (Google “BOSS” and “Son of BOSS” sometime.) Madoff created an aura of secrecy; we all know the truth now.

On the positive side, let the Madoff story make you feel good about investing in mutual funds (public, audited returns) and losing some money temporarily in the market. And feel even better that you aren’t part of clubs where guys like Madoff are preying on their next victims/friends!

By Mary Claire Allvine