Don’t end up like a Madoff Victim

The Bernie Madoff affair reached its sad conclusion this summer with the disgraced financier?s sentence of 150 years, the maximum possible. If there is another, more sympathetic, side to his appalling saga, it remains to be told. Madoff himself has offered no justification and only the vaguest of apologies, turning to tell victims that ?I?m sorry. I know that doesn?t help you.?

It certainly doesn?t. My thoughts recently have been less with Madoff than with those victims, nine of whom gave often compelling statements about the hardships they?ve suffered at Madoff?s hands. For most, the likelihood of ever recouping the losses they?ve suffered is remote. Many of them are older, retired and lost the fruits of lifetimes of hard work.

There is something both humbling and compelling about people who were wealthy, or at least thought they were wealthy based on their Madoff account statements, who suddenly face the prospect of near destitution. I suspect there aren?t many of those; some of the superwealthy victims will likely hardly notice their Madoff losses. And yet seeing the Madoff victims reminds me how fleeting good fortune can be.

After all, it doesn?t take a Ponzi scheme to suffer a reversal of fortune. Pop star Michael Jackson earned hundreds of millions during his spectacular career, cut short by his sudden death in June. He also made shrewd business decisions, acquiring the publishing rights to the Beatles? catalogue for $47 million (now estimated to be worth more than $1 billion and held in a joint venture with Sony). If anyone could be said to have had it made, it would be Jackson. And yet he was laboring under the burden of an estimated $500 million in debt. Like some of Madoff?s victims, he found it necessary to go back to work, embarking on a grueling rehearsal and performance schedule that could ultimately have earned him $400 million.

Or consider Ed McMahon, who earned millions as Johnny Carson?s amiable sidekick on ?The Tonight Show? and as a pitchman for everything from dog food to Mercedes-Benz. His death in June followed highly publicized problems last year, when he faced foreclosure over $4.8? million in mortgages on his Beverly Hills mansion and was being sued for other unpaid debts.

Jackson appears to have been guilty of profligate spending and reckless indifference to his financial affairs. McMahon, appearing on ?Larry King Live? to discuss his financial setbacks, said only that ?if you spend more money than you make, you know what happens.? Victims of a Ponzi scheme or other outright fraud can of course maintain that it?s not their fault. But once you?ve lost it, does it really matter why?

Our culture often glorifies financial success, but it?s an illusion to think that, just because you?ve made money, you?re set for life. Highly-paid and visible sports stars and entertainers seem especially prone to dramatic financial setbacks (perhaps because their money problems are more likely to end up in the news). But surely everyone knows someone who has suffered similar misfortunes.

There are tried and true ways to avoid such a fate, starting with the simple maxim to live within your means. Yet most if not all of the Madoff victims no doubt thought they were. Their mistake was assuming they could trust someone else to manage all their money for them. Madoff is fortunately an extreme exception. Yet the financial crisis has unmasked a plethora of disturbing examples of firms putting their interests above their clients, some of it criminal, most of it not.

The vast number of financial advisers and money managers rightly pride themselves on their integrity and devotion to clients? interests, and render valuable services to their clients. Almost everyone can benefit from such a relationship. But no one should abdicate all responsibility for investing and monitoring their hard-earned savings. Simple diversification would have prevented any of Madoff?s victims from losing everything. The basics of personal finance ? markets; stocks, mutual funds and exchange-traded funds; bonds and interest rates; asset allocation and diversification; the relationship between risk and reward ? are not all that complicated. Why isn?t such a course offered, at least as an elective, at every high school in America?

Educating yourself and taking at least some responsibility for your financial security don?t guarantee against catastrophic loss. But it does mean you won?t be someone else?s victim.


2009 Copyright The New York Times Syndicate