Safe Investments: Avoid Being Wiped Out By Crooks Like Madoff
After spending years saving for retirement, the last thing you want is to lose your hard-earned money to a huckster who cons you out of your cash. But how can you avoid having your savings decimated by a Ponzi scheme or other fraud, like those perpetrated by Bernie Madoff and Kenneth Starr?
This was a question I was asked at one of my recent retirement planning workshops. After all, the workshop attendee wondered, if Madoff could dupe large banks, hedge funds, insurance companies, pension funds, universities and well-known celebrities, and if Starr could steal millions from Hollywood movie stars, how can ordinary folks like us avoid this fate?
There's plenty of conventional advice out there that can help keep your money safe, but it may not be enough to avoid being taken. Fortunately, there are some simple strategies you can employ that can give you the protection you're seeking. Let's take a look.
Check Credentials and References
Your first line of defense should be to do your own investigating to check the credentials and references of any person or company you're thinking about investing with; don't invest with someone just because other supposedly smart institutions and people have invested with them. That's exactly how Madoff expanded his list of victims.
But Madoff was once the chairman of the NASDAQ stock market, and he had sterling credentials and references. Shouldn't that be good enough? Clearly, it wasn't. There's still more you should do before deciding to invest.
If It's Too Good to Be True ...
Your next step is to learn about the reasonable rates of return you can expect from various types of investments, so you can spot claims of investment returns that are unrealistic. For example, Madoff promised consistent returns between 10 and 15 percent per year, with only a few modest down months over almost 15 years. Anybody investing in the stock market should know that it's virtually impossible to have such consistent returns with no significant downside.
Knowing reasonable rates of return to expect is good advice, but is this type of analysis realistic for ordinary folks? After all, some analysts followed Madoff for years and hadn't detected his fraud. So what else should you do?
Work With a Financial Advisor
I've often suggested that you might need to seek help from a professional financial advisor, especially if you don't have the time or inclination to do the kind of homework it takes to make informed investment decisions. And this might have helped some of those who were conned to avoid Madoff's fraud. But Madoff duped many financial advisors, and people who trusted those advisors became victims as well.
So what now?
Diversify
Now we're on to something. If Madoff's victims had had the discipline to invest no more than 10 percent of their assets with him, they would have been hurt, but they certainly wouldn't have been wiped out. Even some financial advisors didn't follow this basic common sense and invested large chunks of their clients' money with Madoff.
So here's another piece of advice: If you're working with a financial advisor, insist that no more than 10 percent of your assets be placed in any one investment. Learn what your advisor is investing in, and read the audited financial statements you should be receiving. Madoff provided scant details on the investments of his firm. If your financial advisor doesn't follow your guidelines or won't show you audited financial statements, get another advisor, and make sure you can see the full extent of your investments at any time.
There's one last thing...
Keep It Simple
If Madoff's victims had invested in broad-based, no-load mutual funds, such as those offered by Vanguard, Fidelity, or T. Rowe Price, they wouldn't have lost everything. No-load mutual funds are audited by large, reputable accounting firms; not small shops like Madoff's accountant.
For instance, Vanguard's Wellington Fund, with roughly two-thirds invested in stocks and one-third in bonds, has achieved an average annual rate of return of more than 8 percent since 1929. That type of return should be good enough to fund your retirement -- you don't need to take risks to achieve higher returns. And this is what baffled me: Madoff and Starr cheated rich people who had already won the money game. They could have invested in T-bills and still had a great life, but they chose to risk more than they needed to.
Granted, there's some downside risk to investing with Vanguard's Wellington fund, with two down years (losses of 22.3 percent during 2008 and 6.9 percent in 2002) in the past fifteen. But in spite of the large loss in 2008 and early 2009, the Wellington Fund has since surpassed the pre-crash high value it reached in late 2007. And while the Wellington fund's returns haven't been quite as good as the returns Madoff claimed, they are much better than the returns that Madoff's victims have now actually received.
Of course, when your nest egg is compounding at 8 percent in broad-based funds such as Wellington, you can't brag at parties that you've got a secret, that you've been accepted by a genius investor who is very exclusive, and that you're beating the market every year. That was a big attraction for Madoff's victims. But by keeping it simple and following the guidelines described above, you can rest assured that your investments won't be totally wiped out.
Lessons learned:
- Follow basic diversification guidelines.
- Know what you're investing in -- read audited financial statements.
- Don't be so trusting that you don't ever check on your financial advisor -- that's what happened with Starr's celebrity clients who totally turned their finances over to him.
- Don't get greedy -- set up your finances so you can retire by achieving rates of return that are reasonable for portfolios balanced between stocks and bonds.
- Don't let your ego get in the way -- you're investing for retirement income, not for bragging rights.
Want to learn more about retirement planning? Check out my latest creation -- an innovative online retirement planning guide called Money for Life. I've organized a rich collection of more than 150 blog posts, articles, and research reports on the most important retirement planning decisions regarding money, health, and lifestyle.
More on MoneyWatch:
- Planning Your Retirement: The Best Investments During Retirement
- The Best Investments During Retirement: Gauging Risk
- Recession-Proof Your Retirement Savings
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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