Skip to site content
The Show

Protecting Yourself From Fraud

As if the financial markets weren’t scary enough in 2008, here comes the story of a snake who decided to take advantage of people and subsequently make millions and millions of dollars doing it. Bernard Madoff, ole’ Uncle Bernie, created one of the largest Ponzi schemes ever. Basically, a Ponzi scheme is one in which current participants are paid by future participants. It is a pyramid scheme. This story especially hits home with fee-only planners such as myself.

As you probably know by now, I’ve been managing money for about 13 years. One of the hardest things about being a financial planner, especially one held to a fiduciary standard, is constantly dealing with the too good to be true scams out there. I’ve said it before and I will say it again, MOST TIMES if an investment or a product seems too good to be true, then it probably is. This past year has been a perfect example. In 2008, the S&P 500 lost 38.5%. Had you been involved in the Madoff Ponzi scheme, it is very probable you would believe your portfolio was up 8%-12%. How could this be so? It COULDN’T! Please don’t get me wrong, it is possible for individuals to have some good years picking stocks, and it is possible in 2008 there were a handful of stocks that returned 12%. What I find nearly impossible is that a properly allocated and well-diversified portfolio could return 12% in a year the market returned -38.5%. So what was leading these individuals to believe they were making money? Uncle Bernie was telling them so! There was no evidence nor proof of any of these returns. Individuals couldn’t go to Yahoo! Finance and look up the values of their holdings. Madoff held his client assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite the market turmoil.

While being negative is never a good thing, it is possible to limit the amount of volatility you experience through asset allocation and diversification. It is hard for individuals to brag, however, about -20% when they go to a Christmas or New Years party and hear one of their friends made 10% in a -38.5% year. Realistically, though, being down 18% less than the broad markets is a significant achievement.  Another scary aspect of this situation is the fact that some advisers fell prey to this Ponzi scheme. They would entrust their clients’ assets to someone like Bernard Madoff because they genuinely believed they were providing consistent out sized returns. These advisers may not have been stealing or cheating their clients out of money, but they were definitely not practicing due diligence to verify that these returns were legitimate.

As you listen to the podcast you’ll hear the story of a fellow NAPFA adviser out on the west coast who shares his encounter with a Ponzi scheme during the last bear market. I go on to provide you with three tips on how to avoid letting yourself get caught up in a similar scheme or fraud. I finish up by sharing with you some of the exciting changes the Money-Guy show will be making in 2009. I have received your feedback and I am accepting the challenge to kick it up a notch. I hope you had an enjoyable holiday season and I look forward to restoring order and going beyond common sense in 2009!

Enjoy the Show?

Where You Can Watch and Listen:

Subscribe on these platforms or wherever you listen to podcasts for new episodes every Friday, live streams every Tuesday at 10am CT, and new highlight clips throughout the week.

Related Content

Free Resources

Financial Order of Operations®: Maximize Your Army of Dollar Bills!

Here are the 9 steps you’ve been waiting for Building wealth is simple when you know what to do and…

View Resource

Wealth Multiplier By Age

How much to save every month to become a millionaire.

View Resource

How Much Should You Save?

How much of your income can you replace in retirement? You can replace different portions of your income in retirement…

View Resource

Articles

How To Save for Retirement When You Have a Pension

, , ,

Read More

How Will the Next President Affect the Stock Market?

, ,

Read More

Is Paying Off Your Mortgage Early a Good Idea? The Truth Is Complicated

, ,

Read More

Financial FAQs

Courses & Tools

How about more sense and more money?

Check for blindspots and shift into the financial fast-lane. Join a community of like minded Financial Mutants as we accelerate our wealth building process and have fun while doing it.

https://moneyguy.com/wp-content/uploads/2023/10/accent-icon-book.png

Millionaire Mission (Brian’s Book)

Buy Now
https://moneyguy.com/wp-content/uploads/2023/10/accent-icon-math.png

Know Your Number Course

Buy Now
https://moneyguy.com/wp-content/uploads/2023/10/accent-icon-pencil.png

The Money Guy Net Worth Tool

Buy Now

Recent Episodes

It's like finding some change in the couch cushions.

Watch or listen every week to learn and apply financial strategies to grow your wealth and live your best life.

When Always Be Buying Goes WRONG

When Always Be Buying Goes WRONG!

Watch Now

Financial Advisors React to Horrible Tax Advice on TikTok

Watch Now
2025 Tax Changes

2025 Tax Changes You Can’t Afford to Ignore!

Watch Now