Most of you by now have read articles about Bernie Madoff, the investment “genius” who consistently obtained double digit returns for his investors for over 20 years, by what turned out to be a “Ponzi scheme.” Though most of us are not investing at the Bernie Madoff level ($1,000,000 +), the loss of tens of thousands of dollars could be just as catastrophic.
It appears that the money people invested with Madoff was simply stolen. No underlying assets remain for his investors. The victims of Madoff’s $50 billion fraud will probably not get back any of their initial investment. Because of this, Madoff’s investors are much worse off than those of us whose securities have suffered a serious market decline, but may appreciate again one day.
Keep in mind that if your investments are placed with a legitimate broker, they may be covered by SIPC insurance. The SIPC (Securities Investor Protection Corporation) protects up to $500,000 of your securities investments in the event they are stolen, or your brokerage firm closes due to bankruptcy. SIPC insurance covers stocks, bonds, mutual funds shares and most registered securities. Some brokerage companies even provide additional insurance in excess of the SIPC insurance amount. However, SIPC does not cover all investments. For example, unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interests in gold, silver, or other commodity futures contracts or commodity options are not covered by SIPC insurance. It is important to remember that SIPC does not protect against market losses. Nor does it cover your losses if you hold the stock of a company that goes bankrupt.
The Madoff scheme reminds us to heed basic lessons about investing. While our firm does not provide investment advice for our clients, one of the primary and better known rules of successful investing is diversification. Too often this basic principle is overlooked when a particular investment is highly profitable. It’s wise to keep the benefits of diversification in mind even when some of your investments are soaring.
Years ago there was a popular book by Robert Fulghum entitled “All I Really Need to Know I Learned in Kindergarten.” A variation on the theme of that book is that life’s most important lessons are often those we learned as children. We can probably all recall our parents telling us life lessons like:
1. If it sounds too good to be true, it probably is
2. Slow and steady wins the race
3. There is no such thing as a free lunch
4. Don’t put all your eggs in one basket.
Even today these old sayings contain truth and wisdom that can guide us to successful investing.
The current economic times are difficult for all of us, and they can be devastating for anyone who is victimized by a fraudulent investment scheme. If you have confidence in your investment advisor, sit down with him or her and review your current investments. Keep the suggestions, above, in mind and be sure to ask questions. Then determine if the recommendations of your investment advisor “hold up” and meet your particular needs and comfort level.
Larry Gaddis, 12/28/08
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