The current schemes and scandals remind me of a number of people who have approached me, asking if they could engage me to review investment proposals being presented to them by other advisors.  They needed a specialist who would help evaluate the pros and cons of each proposal and only look out for their best interest.  As a Fiduciary, I was intrigued by this suggestion since I love to compare competitive options.

Part of the agreement we made was that my firm could not be an option, so I could be completely objective. Naturally I believe that my investment approach is superior, but I truly understand the need to have someone completely unbiased to help you evaluate alternatives. 

It is a shame that so many of the Madoff clients did not use this approach.  They relied on personal relationships and word of mouth to make their decision, and look what happened.

BE SKEPTICAL.  GET INDEPENDENT ADVICE.

Let’s face it, the regulators have shown yet again that they are not able to protect investors.  So caveat emptor, or buyer beware, is again the order of the day.  I am pretty skeptical of everything I come across in the investment world, since it is my job to protect clients.  Therefore, as Bernie Madoff prepares to spend some quality time in the big house, it is a good time to review the facts that led to his clients losing all their money to a Ponzi scheme.

Madoff produced his own client statements.  That is your first red flag.  You want as many independent parties involved as possible.  Our clients have their assets at an independent custodian, like Schwab or TD Ameritrade.  These institutions hold all client assets, and they provide independent statements to clients.  They also hold insurance policies to protect clients from fraud.

Clients of Madoff could not verify their investments from an independent custodian.  You want to be able to mutually agree to the investment plan with your advisor, and then see those investments in your account at your independent custodian.  Furthermore, it is even better if you hold publicly traded mutual funds or individual securities that mail you independent prospectus information so that you can further verify the validity of your ownership in those investments.

Lastly, Madoff claimed to employ various hedge fund techniques.  Many independent experts have publicly debunked his ability to successfully make these techniques work years ago and avoided being sucked in.  I suggest you seek simple, proven strategies that do not require a “wizard” working behind the curtain.  

It has been a while since we have seen such bad performance in the stock market. 2000-2002 to be exact, when the NASDAQ tech stocks dropped 80% and the S&P 500 dropped about 40%.

Currently, the S&P 500 is down about 18% from its 2007 peak, and the NASDAQ is down about 24%.

So one of the only useful things we can do at a time like this is to reevaluate our “true” risk tolerance level. When the market is going up, all of us are fine with maximum risk. It is only when the market declines that we get an opportunity to really see if we are comfortable with the risk we are taking.

How are you feeling right now? Are you still a believer in the fact that if you want the higher long term rates of return of the stock market, you will have to live through the inevitable market declines?