by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
Dear Smart Profits Report Reader,
Seven months after being caught stealing other people's money, rogue "investor" Bernie Madoff will receive his prison sentence next week. Naturally, he's pleading for leniency while his victims and practically everyone else hope he never spends another day on this earth as a free man.
When the scandal first broke, my local newspaper - The Palm Beach Post - ran profiles and interviews of a few of the victims. While some were uber-rich gazillionaires trust fund babies who got taken for tens or hundreds of millions, many were retirees who spent years building businesses and were enjoying the fruits of their labor. Many had handed Madoff their nest eggs of $2-3 million.
But one particular profile really surprised me...
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From $2 Million To Zero
The guy was a retired stock analyst who'd lost his entire $2 million in savings to Madoff's Ponzi scheme.
Remarkably, this gentleman had nothing else to fall back on. And the likelihood of him finding employment as an analyst was next to nothing, given the blood-letting from Wall Street payrolls over the past two years.
There's a harsh lesson here...What remains so shocking about Madoff's scheme is how sophisticated some of his investors were - and how easily they could have avoided losing everything. To ensure you never wind up in a similar predicament, remember these simple rules...
Three Tips To Avoid A Madoff-Style Investment Disaster
Don't Put All Your Eggs In One Basket: No matter how good an investment, broker, or financial planner is, keep half your money somewhere else. I actually keep my funds spread out over 4 institutions. The majority of it is allocated between two discount brokers, while a small percentage is divided between another two institutions.
So when we appeared to be on the verge of financial Armageddon several months ago, while I was certainly concerned about having access to my funds, I was never worried about being totally wiped out.
There's No Such Thing As A Free Lunch: Madoff investors were taken in by the market-beating, yet still supposedly safe returns on offer. There is no such thing. In order to beat the market by a significant margin you need to take on additional risk.
For example, since the inception of my small-cap healthcare service, Access, I've beaten the S&P 500 by 40 percentage points (as of Wednesday, June 24). In fact, throughout my career, I've beaten the S&P 500 on a consistent basis.
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But you must realize that I can't guarantee a performance like that, yet still promise iron-clad safety. While there's certainly nothing wrong with safety if you need to preserve capital and generate income, if you're looking for market-beating returns, you usually have to take on some additional risk.
Take Some Money Off The Table: Even after years of "profits," some of the Madoff investors never took any of their money out. Alas, good times don't last forever, so if a stock or investment has enjoyed a nice run, take some profits.
Plus, it's actually easier to let a winner run higher when you've lowered your risk by banking some profits.
I use this as a rule of thumb (and I learned it the hard way): Whenever a stock doubles, sell half the position. That way, your original investment is no longer at risk.
Remembering these three basic rules can not only help you avoid unscrupulous con men like Madoff, but also other investment disasters, due to stock plunges, market crashes, or even a full-scale financial meltdown.
Hoping your longs go up and your shorts go down.
(Courtesy:www.smartprofitsreport.com)
