A Bitter Lesson

Posted on July 10th, 2009

From the news reports that I have read about the Madoff scandal, most of the people who were highlighted lost all or nearly all of their wealth through investing with Mr. Madoff.  What if these same clients had an investment portfolio similar to that of the typical millionaire in America? Then less than 30% of their wealth would be invested in publicly held stock, i.e. common stock managed under the Madoff brand. If they did the maximum they would have lost would have been less than 30% of their wealth.

Back in 1985, I put together the first set of commandments for building wealth based on my research of the habits of self made millionaires.  One of the most important commandments was "Thou shall not have a single source of financial advice."  And since that time I have preached this message. 

When the investment gurus talk about diversification, they show how very parochial they are. Real safety is not in a diversified stock portfolio.  One of the reasons that real millionaires are economically successful is that they think differently.  Many a millionaire has told me that true diversity has much to do with controlling one's investments; no one can control the stock market. But you can, for example, control your own business, private investments, and money you lend to private parties.

In a way, the credit crisis of 2008-2009 is serving as something of an intervention.  But for the treatment to work, people must begin to think and act for themselves when it comes to investing and especially selecting sources of financial advice.

Category: Current Events
Tags: investing, diversification, Madoff, wealthy, ,