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Diversification Would Have Beaten Madoff
It's amazing to see how many supposedly sophisticated investors and institutions were taken in by Bernie Madoff: HSBC [HBC
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], Banco Santander [STD
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], Royal Bank of Scotland [RBS
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], Senator Frank Lautenberg (D-N.J.) and seemingly half of the people my mother knows. On Friday's show we talked about all the red flags raised by Madoff's operation, the signs that something was wrong and it was time to get out.
But right now, as I hear and read about people who were "totally wiped out" by the collapse of Madoff's "money management" business, I have to wonder, haven't they seen us play "Am I Diversified?"
Ordinarily we don't tell people who invest in a diversified mutual fund to own multiple funds, because they're already diversified by sector – the kind of diversification that counts – in that single fund. But Bernie Madoff wasn't running a fund, he was a wealth-management guy with returns that were too consistent to be trusted. Remember, never put all of your eggs in one basket, especially if that basket belongs to a con-man.
If investors were dead set on investing with this guy, they should have approached his firm like a speculative stock. There were too many questions and allegations about Madoff in the media for anyone not to be at least a little suspicious. And our rule for speculation is never more than 20% of your non-retirement portfolio. That way, at least they would only have lost one-fifth of their money and not seen their wealth totally destroyed by Madoff's collapse.
Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Rich and Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.
Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.
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