Alpha Consumer

Bernie Madoff Lesson: Diversify

By Kimberly Palmer

Posted: December 17, 2008

The stories about families losing their life savings because their money was invested through Bernie Madoff are heartbreaking. In addition to the wealthy and powerful, such as the Uma Thurman’s fiancé, plenty of ordinary folks have also lost out because of the alleged $50 billion fraud perpetuated by Madoff.

Perhaps it’s not always possible to make sure your money in 100 percent safe, but the basic rule of investing – to diversify -- would have helped these victims avoid their fate.

Diversification – in stocks, market segments, and institutions -- reduces the chances of losing everything. If one fund goes under, you still have the others. The families that put all their money with Madoff would have been much less exposed if they spread out their savings to multiple institutions and investors.

Of course, in hindsight, it’s easy to see what the victims could have done better. Now all they can do is wait – and hope to recover some of their assets.

This was exactly my very first point too

When I have heard about this heist and I watched a story of a family on CNN who lost everything, my first thought was, they they were either stupid, or so incredibly greedy that they forgot to play safely and acted stupid anyway. They deserved their loss. I am sorry to say it, but it is what I think about this issue.

I wrote my ideas on diversification in regards to this scam on my blog: http://hellosuckers.net/?p=102

Martin of CO @ Jan 03, 2009 02:00:33 AM

Diversification is not a basic rule of investing

Diversification merely reduces volatility. However, there is more to risk than mere volatility. The basic rule of investing is: Know what you are buying.

Early Retirement Extreme of CA @ Dec 18, 2008 16:21:51 PM

Investing with Bernie

There has been much written about the stupidity and greed of people who have invested in Madoff's fund, as we called it. This particular investment paid above average returns to me and members of my family for over 30 years. It was hard not to be caught up in the scheme. We would send back funds on a regular basis to grow our principal and get back a little more the next time a check was due, although it didn't necessarily happen. Diversification in today's market would have brought with it diminishing returns and loss of principal. You could say we were asleep at the wheel, trusting a man who my great uncle put on the stock exchange in 1960. Never in a million years would we even think this investment was tainted and ripe for eventual doom. People are saying it was an honor to be invested with Bernie and his legions... well, it was for a time but now it is the kiss of death for many who trusted this two-faced piece of garbage. May he rot in jail and hell for what he has perpetrated to innocent people and organizations.

Elliott Marshall of FL @ Dec 18, 2008 02:03:25 AM

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Alpha Consumer

Alpha Consumer

Kimberly Palmer, senior editor for U.S. News & World Report, writes about how to save money, avoid scams, manage debt, and be a savvy shopper. Send your personal finance questions to her for expert money advice.


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