Investing Rules Learned from the Bernard Madoff Scandal

The Bernie Madoff scandal is a sad case of the lack of care by the investing public. It’s amazing that so many sophisticated investors just handed money to this man without thinking about doing any due diligence. It’s understandable for average citizens as they lack the expertise to decipher the often complex documents and investment schemes but even fund managers were caught off guard!

Looking at the bright side though, this is a great reminder of some of the most prudent investment advices that never gets old. Let’s look at what Mr Madoff reminded us:

Diversify Amongst Each Investment Class – We almost beat this advice to the ground but it’s just so easy not to be totally diversified! If anything, the whole 2008 should provide a strong reminder that it’s very easy to lose everything in an instant. Not only the Madoff scandal but think of Enron, or as recent as Washington Mutual, Bear Sterns, or Lehman Brothers. Think Opposite – When it’s too good to be true, it usually is. Mr. Madoff’s consistency in superior market returns were like clockwork. The better things are, the more cautious we should become! Every time you outperform the market, you should take some money and re-balance to other funds that underperformed because no strategy is just “better” than others! Do Your Homework – It’s your money so do your own research and analysis to make sure you understand how the investment makes money! Otherwise, how do you know whether it’s even a good investment for the future? Diversify Across Different Asset Classes – This is so important that it needs to be broken down and restated. Those that had their lifesavings with Madoff tell a tragic story. Not only should you diversify across different investments within the same class, you should have a diversified asset allocation! Spread out your wealth with stocks, bonds, savings, real estate, commodity and others! Speak with Someone About Your Decisions – It never hurts to talk to someone about your financial decisions, especially if these are part of a long term plan. There are many fee-based certified financial planners who can help you draft up a plan. The good thing about a fee-based planner versus one that takes a percentage? You can have more than one to cross check.

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