In December 2008, the unraveling of Bernie Madoff's Ponzi scheme turned the investment world upside down. Investors, investment firms, regulators, and charities suffered catastrophic losses. People's faith in the financial system was profoundly shaken in ways that have not yet fully been resolved. It's been two years, and new Ponzi schemes and securities fraud cases continue to come to light every week. How should investors respond?
Learn from it, advises Barry Ritholtz, the CEO and Director of Equity Research at Fusion IQ, an online quantitative research firm. In a recent article on BusinessInsider.com, Ritholtz offered investors ten lessons to be learned from the Maoff scheme. A few among them:
#7. Diversify your assets among several unaffiliated financial firms. Many investors lost everything in Madoff's scheme, because they had invested all of their assets with him. "If the worst happens, this is a recipe for disaster," wrote Ritholtz.
#5. Make sure you fully understand each and every one of your investments. You should be able to articulate the benefits, the risk factors, the projected returns, the basis of the investment, and the investment strategy.
#2. Remember: "Too good to be true" is a cliché for a reason. If you're promised overly high returns at super-low risk, there's probably something fishy about the investment.
#1. It is imperative that you conduct proper and detailed research on every financial professional and investment product you consider. Don't rely on third party references or testimonials - perform your own due diligence.
What should an investor do if they fears their money is tied up in a Ponzi scheme? Ritholtz advises to withdraw their cash via facsimile or registered letter without a reference to why.
Next step? We advise all investors who believe they may be the victims of investment fraud to consult with an attorney to find out how to recover losses and hold the schemer accountable.