Over the weekend, Bernard Madoff of Madoff Funds, was arrested for securities fraud, and he has admitted to swindling hundreds to thousands of investors out of $50 billion dollars over an undisclosed period of time. Madoff has been in business managing investments since 1960, but he also ran a hedge fund that was basically a Ponzi scheme. A ponzi scheme is a scam where early investors are paid investment returns from later investor’s money. Eventually, all of the money is gone and everyone loses out. There is never enough money to support the money paid back to earlier investors. Madoff’s hedge fund was boasting huge returns on investment, and this is how he attracted so many investors, including big names like Steven Spielberg.
My opinion is that Madoff started a hedge fund without the intention of it turning into a Ponzi scheme, but when he made bad investments and the hedge fund went broke, he tried salvaging it with illegal practices and reported false returns in an effort to attract more investors to pay off earlier investors. The only good news about this story is that he confessed to everything and by the honesty of his information to the Feds, it sounds like he is remorseful about the entire situation. However, that doesn’t help the fact that he ruined the financial lives of many charities, retired people, and other high net worth investors that lost their retirement nest egg.
What can we learn from this story?
- Always have full control of your money and your investments. Be involved with your money on a daily basis. If an investment, mutual fund, or hedge fund seems like something fishy is going on, get out of it. Never set and forget your investments, assuming that it will taken care of and your finances are on auto pilot. It’s your money, and you make the final decisions on your investments.
- Do your research. Surround yourself with a financial advisor and CPA that you trust to help you make financial decisions. You’re not an expert, and you don’t have time to be an expert, so surround yourself with people that can help you make your investment decisions.
- If it seems too good to be true, it probably is too good to be true. Follow this timeless piece of advice, and you will never be lured into a scam. Many investors were lured into the returns that this fund was boasting, so they put much of their nest egg in one basket. We all have gut feelings, and if your gut feeling says something isn’t right about a certain investment, then stay away from it. Your gut is probably right.
- Diversify, Diversify, and Diversify. So many investors forget about this crucial key to investing. Diversifying your portfolio is finance 101, yet so many people disregard it. I would never put more than 10 to 20% of my long term investments into one mutual fund, single stock, hedge fund, or any other type of investment.
It’s a sad story, because so many people were affected by this, and now they will be starting over or essentially never experiencing a retirement. But, the good news is that they caught him, and many investors will learn from this story.