Duffy has taken a little break but is in blogging mode. Today we're going to discuss Duffy's take on all the recent scams and Ponzi schemes that have been unearthed in the past year. Let's start with the Madoff scam, the largest Ponzi scheme ever discovered and one that apparently went on for more than 20 years. Many books will be written about how Madoff pulled this off (some already are) but I think Madoff shows the main factor of how these things get started and keep on going. And that factor is, trust. Madoff was noteworthy in that he preyed on mostly his Jewish friends and contacts and continued to burnish his own reputation as a Wall Street insider who "knew the rules and how to play the game". His genius was to credit his victims with a reasonable steady return on their investments, never too much year by year but always a steady investment income. In other words, what most investors want from their money. His undoing was the astounding collapse in the entire financial system that panicked his investors who wanted to get liquid as much as possible. Like a receding tide exposing hidden shipwrecks, Madoff quickly ran out of money to redeem to his clients. So far, many other Ponzi scams have been uncovered due to the unprecedented recession the past two years. Duffy suspects more will be uncovered in the months ahead.
Why would otherwise intelligent people entrust their funds, even life savings to one individual? Greed is one aspect but more importantly in Duffy's view is that people trusted ole' Bernie to do right by them. Apparently a lot of proper due diligence was not done because of Madoff's reputation and insider status as well as testimonials from his early clients who, in fact, got paid oftentimes more than they put in.
Fraud like this is hard to detect and a lot of people are going to change their investment philosophy due to the numerous scams that have been unearthed the past year. "Trust but verify" as President Reagan said.
Duffy has never been scammed (not yet anyway) and has followed some iron core rules over the years that has enabled him and his family to maintain their lifestyles even into retirement. Let me share them with you.
First of all this treatise is intended mainly for young folks, single , married and married with kids. During this Great Recession a lot of these pointers will be disregarded or ignored for folks who are treading water in the shark tank without a life preserver. Nevertheless, when things do get better, and trust ole' Duffy the economy will get better and hopefully will be back to "normal" (whatever normal is) by the end of next year. Elections are coming up and the Democrats need people back to work. They will do whatever it takes to get folks working again. "Normal" won't be like partying like it's 1999 but it won't be like panic in 2008 either.
1) You need insurance. Health of course but also life insurance, especially for those with families. If both parents work then both should have adequate coverage, at least five times your salary.
2) A reserve fund. Duffy's rule of thumb is six months equal to the highest wage earner's take home pay. Start at three months as a goal and work up to six. Duffy got it as high as a year at one point. That pile of cash is a nice safeguard if one or both lose their jobs.
3) Never finance a car longer than 48 months. Longer and you will be "underwater" the entire period of car payments. Cars last longer and you get a nice paycheck from yourself if you can pay off the car before the loan period ends.
4) Proper use of credit. Duffy believes you only need two credit cards. One for normal use and one for emergencies. An emergency is not a new HD TV or Coach purse. Get into the habit of PAYING OFF YOUR CARD EVERY MONTH! Think about using VISA's money for free for a month, every month. You are using their money for 30 days for free! What a deal is that? You have to determine what your limit is every month. That is the hard part as well as having the fortitude to stay within that limit.
5) If a deal sounds too good to be true, it probably is. Just because Uncle Fred is investing in cocoa futures and making a killing does not mean you should too.
6) Diversify. Never put all your funds in one investment. Don't heavily invest in your company.Spread your investments around many different asset classes, e.g. stocks, bonds, real estate funds, cash. Find a solid, reliable and strong financial institution to use as investment managers like Fidelity, Prudential, Vanguard, etc.
7) Make a budget and stick to it. Both spouses have to buy into the budget and even though little emergencies will pop up from time to time, keep your eye on the ball for the long view.
Finally, in spite of the worst recession since the Great Depression, Duffy believes this too shall pass. Wall Street and Washington have been scared silly by what happened last year and Duffy believes will take corrective action to make sure something like this won't happen for another fifty years. The above suggestions are all common sense and I'm sure people who read this blog have their own systems to manage their affairs but being diversified, sticking to a goal and being sceptical,prudent and reasonable in expections will save a lot of heartache if followed.
Have a great Thanksgiving!