Investing Rules Learned from the Bernard Madoff Scandal

by Investing School on January 12, 2009

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:

  1. 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.
  2. 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!
  3. 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?
  4. 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!
  5. 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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{ 2 comments… read them below or add one }

The Brandless Blog January 12, 2009 at 9:18 am


I think the main reason for the failure is due to Mr. GREED.

1. People don’t diversify because Mr. GREED wants them to earn more out of the fastest growing company
2. Some of them knew it is too good to be true, but Mr. GREED tells them this is really your dream comes true
3. They did their homework with Mr. GREED.
4. People don’t diversify because Mr. GREED wants them to earn more out the fastest growing asset class.
5. They spoke to Mr. GREED about their investment.

The Brandless Blog


San Francisco Financial Planners January 12, 2009 at 3:01 pm

Yes – seek out some professional help to advise you on how to manage your money. You don’t have to do it along. However, you can be smart by hiring an adviser who works on a flat fee or an hourly fee, so you know that he or she is working for YOU and not for a commission. And Try to find a planner who is at about your same life stage so that they have a good understanding of where you are and where you want to be. For instance, I have two young children and my whole practice is geared towards new and expectant parents. I am highly tuned into the challenges that come with a growing family and can closely relate to my clients. On the other hand, I wouldn’t take on a client who is nearing retirement, since I don’t have as much insight to their goals and worries.


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