CNBC Guest Blog

Published: Tuesday, 30 Jun 2009 | 1:39 PM ET

Text Size

People tend to see what they want to see, so it's not surprising Bernie Madoff was able to convince scores of investors his scam was legit. And while many still wonder how such a large-scale fraud could happen, there were a number of missed warning signs for investors.

So rather than be mad at Madoff, we should thank him for reminding us of certain lessons we seem to have forgotten:

1) Never put all your eggs in one basket. You've heard the stories about people who lost everything with Madoff. That's what happens when you put all your faith in one investment. Diversify, diversify, diversify.

2) If it sounds too good to be true, it probably is. After all, if the market is losing 30 percent and your money manager is always up, you may be too busy counting your blessings to track the details.

3.) If someone only caters to the elite, be skeptical. If someone makes their product or what they do sound like it is reserved only for the rich and that makes you want it more, be skeptical, because there is likely more to the story.

4.) Stop being so trusting. P.T. Barnum told us that a long time ago there is a sucker born every minute. A healthy dose of skepticism really is a very good thing. It helps you manage risk and profit in the long run.

5.) Always ask questions, especially when things are going well. In reality, the Madoff scam is a classic example of how the old adage, "if it ain't broke, don’t fix it" can come back to bite you. Madoff's scam didn’t look “broke” for many years, and that should be the first red flag for any professional money manager. Always look under the hood.

6.) Do your own homework. Do not blindly trust a friend's opinion or recommendation. How many Madoff investors became involved only because a friend told them about him? You need to look behind the scenes so you can determine your own best course of action.

7.) Take responsibility for all your personal and financial decisions. This is the most important lesson of all. It's your life, your money. Don't give control over to someone else.

Think better, invest smarter.

_________________________

Doug Hirschhorn is the chief executive officer of Edge Consulting, a firm specializing in “Peak Performance Coaching.”  He holds a Ph.D. in Psychology with a specialization in sport psychology, and has offices in New York and South Florida. His client list includes elite athletes as well as many of the largest banks, hedge funds and financial institutions in the world. Doug is presently at work on his new book, 8 Ways to Great (Putnam, 2010).

Have a question for Doug? You can reach him through his Web site, DrDoug.com

Disclaimer: Doug Hirschhorn's expertise is in the psychology of achieving peak performance. He is not a financial advisor and does not make trading or investment recommendations or provide trading or investment advice. He is an expert on the mental game. Although Doug Hirschhorn has a Ph.D. in Psychology with a specialization in sport psychology, he is not a licensed psychologist and does not provide therapeutic, clinical or counseling services.

Print

Email

Text Size