Unfortunately, we are all now too familiar with Bernie Madoff, the once-storied hedge fund manager who was running nothing more than a $50 Billion Ponzi scheme. Undoubtedly, the size and depth of this scandal will bring about needed regulation, but what can the individual investor do now to protect themselves from investment scams? A few suggested guidelines may help.
If It Sounds Too Good to Be True, It Is
Notice that the word probably is not used here. Madoff did not report consistently above-average returns, but he did report consistent returns without fail, in good and bad markets. This should have been a red flag, however investors ignored this and unfortunately are paying handsomely. Any investment that promises anything should be viewed with extreme caution, especially when tauting above-average returns (or in this case, improbable consistency).
Diversify
You must hold a mix of asset classes in your portfolio. Experienced investors and advisors know that today’s winners could be tomorrow’s losers, and that winners rotate, therefore diversifying across many asset classes and market sectors is mandatory for long-term success. Some have learned this the hard way, but nonetheless, if you are not already doing so diversify now.
Avoid Conflicts of Interest
Clearly a major conflict of interest existed with Madoff and the hedge funds that used his firm. We cannot speak for their due diligence, or lack there of, but the main problem lies with the incentive for the funds and their managers to stick with Madoff – that is how they got paid. It’s very important to understand how your advisor is compensated for his or her services. Madoff was very reluctant to disclose information on how his firm was even making money using his “propriatary” trading tactics. We now know what those tactics were. Advisors, like ourselves, who use a fee-only system, free themselves from any conflicts of interest. We are not compensated with commissions, loads, or kickbacks that predominate our industy currently. Our fee arrangement is completely transparent.
Not only will these simple guidelines help you avoid an investment scam, they most likely will help you achive the long-term results you seek.
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Lessons from the Madoff Scandal
Unfortunately, we are all now too familiar with Bernie Madoff, the once-storied hedge fund manager who was running nothing more than a $50 Billion Ponzi scheme. Undoubtedly, the size and depth of this scandal will bring about needed regulation, but what can the individual investor do now to protect themselves from investment scams? A few suggested guidelines may help.
If It Sounds Too Good to Be True, It Is
Notice that the word probably is not used here. Madoff did not report consistently above-average returns, but he did report consistent returns without fail, in good and bad markets. This should have been a red flag, however investors ignored this and unfortunately are paying handsomely. Any investment that promises anything should be viewed with extreme caution, especially when tauting above-average returns (or in this case, improbable consistency).
Diversify
You must hold a mix of asset classes in your portfolio. Experienced investors and advisors know that today’s winners could be tomorrow’s losers, and that winners rotate, therefore diversifying across many asset classes and market sectors is mandatory for long-term success. Some have learned this the hard way, but nonetheless, if you are not already doing so diversify now.
Avoid Conflicts of Interest
Clearly a major conflict of interest existed with Madoff and the hedge funds that used his firm. We cannot speak for their due diligence, or lack there of, but the main problem lies with the incentive for the funds and their managers to stick with Madoff – that is how they got paid. It’s very important to understand how your advisor is compensated for his or her services. Madoff was very reluctant to disclose information on how his firm was even making money using his “propriatary” trading tactics. We now know what those tactics were. Advisors, like ourselves, who use a fee-only system, free themselves from any conflicts of interest. We are not compensated with commissions, loads, or kickbacks that predominate our industy currently. Our fee arrangement is completely transparent.
Not only will these simple guidelines help you avoid an investment scam, they most likely will help you achive the long-term results you seek.