How to Protect yourself from the Bernard Madoffs of the World Ponzi Schemes Revealed

It’s sad that government watchdogs were not aware of Bernard Madoff’s activities, or just ill-equipped to stop what he was doing before it was too late. Madoff won’t be released from prison, and that may be as close as his victims can get to justice. As unfortunate as these events were for Madoff’s clients, there are lessons to be learned. Not putting all of your eggs in one basket comes to mind. More importantly, you should know how your money is being invested.

Public Investments

Publicly traded stocks, bonds and mutual funds are the safest investments out there, because they are carefully regulated and monitored by the FTC and SEC. The Enron scandal might have scared many investors away, but cases like this are few and far between. Approach private investment opportunities with caution and think things through before taking the leap. You might be told these businesses can give big returns on your money. However, the reality is that they are too risky and some highly questionable activities might be going on.  

Understand the Investment Strategy

Swindlers can’t explain where clients’ money is invested. Another stalling tactic is to provide an answer that is so difficult to understand that even other financial experts are confused. For example, clients may be told they can’t get statements listing their assets because the investments are pooled. Bernard Madoff once said he had no interest in “educating the world on our strategy.” He dodged reporters’ questions, was ambiguous about the firm’s investment advisory services and flatly refused to show any financial statements. What all of this boils down to is that a financial adviser is obligated by law to give you a general idea of how the system works.

Fantastic Returns on Investments

Be suspicious of firms reporting amazingly steady returns. Even financial wizard Warren Buffett loses money on occasion, and so can you. A huge red flag in the Madoff affair was remarkably consistent returns year after year in good and bad markets. With any legal investment, you would have to accept some degree of volatility. What was even more suspicious was that no other person was able to make as much money as Madoff did. 

Second Hand Information

Don’t be fooled into thinking that an investment is safe because somebody you know recommended it. Affinity scams, as they are now called, are one of the favorite methods used by scammers to lure people into Ponzi schemes. Recognize that the person telling you about this investment may also be a victim. Follow your instincts. If something looks like it’s too exotic or unfamiliar, you probably shouldn’t invest your money in it. If you’re close to retirement, be particularly careful. You’re counting on this money to see you through the golden years of your life, so make all investment decisions with sound judgment.