Madoff and the lessons for all investors
Friday, 6 February 2009
I was in Manhattan over the New Year and listening to the Madoff events made me think of why so many investors lost money.
On January 6th in the New York Times, Paul Sullivan wrote about The Rules That Madoff’s Investors Ignored. In fact memories of the Barlow Clowes affair came back to me…
The trick, if there was one, don’t offer the earth, but something that is believable..if only just. This is what Madoff did and similarly Barlow Clowes. If you have forgotten or never heard of Barlow Clowes, click here for information.
As Sullivan said “He didn’t dream up impenetrable financial products; he offered consistently better-than-average returns. Who wouldn’t want that? Delivering 20 percent every year for 30 years would have been too hard to believe (and pay out) while 5 percent would have sent most people searching for more elsewhere. Returning 10 to 12 percent year after year was a stroke of genius: it was within the realm of possibility, if just barely.”
Sullivan comes up with various rules, the first being the 10% rule. In other words, diversification. In hindsight it seems logical and prudent but it was forgotten. Whilst diversifying between say investment funds is good, but that is not real diversification. It would have perhaps helped the Madoff investors from total loss, but diversification according to your risk needs professional help.
Sullivan then talks about CONSISTENCY IS BAD. This opens up a number of issues, but consistency is what investors want. A contradiction exists. Sullivan states “It shows that consistency at the highest level isn’t bad; it’s impossible. There are too many variables that inhibit being great on a regular basis”
As an aside, why were with profits funds so popular? Consistency. Yet there are problems over with profits performance as most statistics show. Could it be that Sullivan is right..Consistency is impossible in the world of with profits as well?
His next Rule: “DON’T ASK, DON’T TELL’ As much as the steady returns were enticing, Mr. Madoff’s investors wanted to bask in the glow of being part of such an elite, select group. They didn’t ask enough questions and seemingly assumed the person who got them in had vetted him. But nothing in which you are putting millions of dollars is so wonderful that it cannot withstand scrutiny.”
The point is not the amounts involved but ensuring the funds you invest into can withstand scrutiny. This process is called carrying out due diligence. In our view, investors with an adviser or bank are unlikely to lose their wealth similar to some Madoff investors. What is at question is the risk you are taking compared to your expected return. Simply losing 1% or 2% per annum over time can make or break your wishes in retirement. It could mean retiring earlier…at age 60 rather than 65 for instance. The world cruise you have promised yourself becomes difficult to justify or even take. So the extra 1%, 2% or 3% each year…which appear to be relatively minor, do not make small differences, but massive differences to your wealth over time.
Sullivans last rule: “PUT MONEY IN BUCKETS Mortimer Zuckerman, the real estate developer and owner of The Daily News of New York, lost $30 million the right way — through his charitable foundation. As harsh as this may sound for the charity’s beneficiaries, he seems to have followed the popular wisdom of private bank investment strategists: divide your money into buckets to insure the money you need to live on will always be safe. Of course, Mr. Zuckerman may have gotten lucky in not losing money he depended on to live. Most strategists advise putting your riskiest assets into your philanthropy bucket — and so many people believed investing with Mr. Madoff was as safe as it got. “
This is a key area as many investors want to help successive generations - their children, grandchildren and also charities. What is important is to understand how much you need in your lifetime, and how much you can divest to others. This is complicated to assess, but is one of the areas we specialise in helping investors understand.
Have you got your money in buckets and do you know how much is in each respective one?
posted by Murray Round Wealth Management @ 10:26,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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