In case you are one of those driven under a rock by the economic news of the past few months, you may have missed the latest news. One of Wall Street’s most prominent investment advisers appears to have walked off with $50 billion dollars in what may qualify as the largest Ponzi scheme in world history. For once, it wasn’t the little guy that got hit. The client list for Madoff Investment Securities included some of America’s wealthiest investors. Sadly it also included some of the charities underwritten by those investors.
So why are the divorce lawyers writing about this? Because every day we are meeting with folks who don’t understand their investments and tend to buy based on “reputation” instead of the facts. Worse, they own things like hedge funds or derivatives without knowing what these things are. These “country club investments” (based on the locale where they tend to be sold) can and often do transform rich people to middle class in a hurry.
The defenses we commonly hear aren’t very good. 1. My spouse handles all of this. 2. We wanted to please a customer or client. And worst of all: 3. The returns were too good to pass up. Ask Mr. Madoff’s clients. Indeed, they were too good to be believed.
It is pretty common during an initial interview to ask a client about an investment only to discover that the client doesn’t know how it works. It is common to see clients who have millions in life insurance but not a penny of disability insurance. It is not uncommon to see 80% or more of an employee’s retirement invested in the stock of the employer. Presumably, this means that the collapse of Enron could not occur again. Until Bear Sterns and Lehman Brothers did it again in 2008.
Certainly, it must be conceded that even the blue chip securities took it on the chin in the fourth quarter of 2008. And the Lipper Indices shows that the pain was felt across the board among the mutual funds. But there are plenty of companies that have seen 80 -90% declines in their stock prices. Are you qualified to decide when to hold and when to fold?
There are two kinds of money in this world; gambling money and retirement money. Investors tend to ignore the distinction. If you have made it to age 40, there is a good chance you will live to 90. That makes for 25 years of retirement. At 40 we see little reason why we can’t work until we are 90 if we need to. But, ask the person who is 70 what employment options he or she has. And if you are 40 with little saved for the golden years, investments in satellite radio or Philippine gold mining are not the way to make up for your refusal to save earlier.
The corollary to this rule is that if you are married to one of these riverboat gamblers you need to realize that you may be lashed to the mast of the boat. If I save and my spouse does not, there will be only one retirement fund to live on. And should my nonsaving spouse decide to dump me and move in with my wealthy neighbor, chances are we will be dividing my retirement savings.
So what are the rules?
1. Save for retirement like you mean it.
2. Make your spouse do the same as soon as realistic
3. Find a professional to manage your retirement money. Make certain that professional
is SIPC insured and that every aspect of the investor operation appears transparent.
4. Challenge your professional to produce returns.