Madoff and (Not) Me
As the Feds slap a 150 year prison term on Bernie Madoff and his investors try to regroup from the devastating Ponzi scheme he concocted, another group of investors, including my seven brothers and sisters who up until seven months ago had never heard of this guy, are re-evaluating our depleted retirement portfolios resulting from the nastiest bear market since the great depression.
Investors of all ages are coming to grips with depressed account values and how it will impact their financial future. Many wonder whether investing in the stock market is even worth it any more, especially when they think that owning common stocks means associating with the greed and arrogance of a Wall Street industry gone awry.
For too long now, the investing public has been brainwashed into thinking that the secret to their investing success was to be found in Wall Street’s ability to pick the top stocks and mutual funds. The financial industry wants us to believe that our financial success is dependent on them, by offering us a deal that is usually too good to be true. More often than not, it is.
It’s time for a change.
This financial crisis should serve as a wake-up call and the beginning of a profound shift in the way investors build retirement portfolios, ignore Wall Street and get on with their lives.
Wall Street doesn’t control our financial future – we control it, and now is the time to recognize it and take charge of it. Why is this so important now? I am not saying it is an opportunity of a lifetime, but because of the significant decline in the stock market over the past 18 months, current valuations suggest that the next decade will generate returns in common stocks that far outpace current yields on CDs and money market accounts. Don’t let the next ten years be your lost decade of investing just because of the today’s turmoil on Wall Street.
My seven siblings and I grew up on a wheat farm in eastern Washington State and didn’t have the country club connections to invest with Bernie Madoff. If given the chance, I am not sure we would have anyway. Over the years we have stuck to three timeless investing principles passed down by our ancestors who homesteaded that farm over a century ago. These principles serve us well, and are at the core of an investment philosophy embraced by a new type of investors across the nation. They are . . .
1. Save for a rainy day. Establishing a personal financial plan is essential to building long-term wealth, as you discover whether or not your saving and spending habits of today are aligned with your short and long-term financial goals of tomorrow.
2. Don’t put all your eggs in one basket. Your personal financial plan allows you to determine a sensible allocation between stocks and bonds based on where you are at in life. John Bogle, Vanguard’s retired chairman and America ’s moral compass when it comes to dealing with Wall Street, suggests a fixed income (bond) allocation equal to your age. Using Bogle’s rule of thumb, a 65-year old’s portfolio would have declined about 13 percent from the peak of the market to the March 9th trough, hardly a financial disaster amid the worst bear market in our lifetime.
3. There is no such thing as a free lunch. Because capital markets are relatively efficient, if not always rational, attempting to beat the stock market through the selection of individual stocks or actively managed mutual funds is a loser’s game, and counterproductive to building long-term financial wealth. The smartest way to construct a globally diversified portfolio is through a line-up of low-cost, broad market index funds.
We have entered a new era of investing, one that invites you to turn away from Wall Street’s empty promises and the excesses of the past twenty-five years and ushers in a new era of personal responsibility. This era will challenge us like never before to look at how we invest in all our resources, including our time and talent, to accentuate our financial and emotional well-being.
It starts by taking responsibility for our future and it begins by embracing three life-long principles we already know to be true. My brothers and sisters wouldn’t have it any other way.