In the last couple of days, the world has received yet another painful reminder of why it is important not to blindly believe “sophisticated investment” offers that you may “luckily” come across. Bernard Madoff, the head of Madoff Funds, was turned in by his own sons for securities fraud. Madoff has admitted to defrauding numerous investors out of what could amount to $50 billion dollars.

What Madoff has done was to create a hedge fund and run it based on a Ponzi scheme. A Ponzi scheme is a fraud where investors who join the fund are paid from the investment money of subsequent investors. This works farily well in a good economy, where new investors keep joining and consistent returns can be guaranteed regardless of how the stock market actually does. However, when the economy sours and many investors wish to cash out at once, the scam is revealed.

Madoff was a well known figure within financial circles since he was the head of NASDAQ in the early 90’s, and this helped him draw many rich investors. Over the years the fund grew in reputation due to Madoff’s “secret formula”, that apparently his sons or any of his other employees were not privy to. Some of the many big name investors that got duped are Stephen Spielberg, real estate titan Mort Zuckerman, and the famous humanitarian Elie Wiesel as well as other less famous people who invested much of their retirement money in the fund. Although Madoff will undoubtedly go to jail, this does not help the fact that he devastated the financial lives of many charities, retired people, and other wealthy investors.

Since every major story has some lessons that we can all learn from, do be sure to keep in mind the combination of the following:

1.  Be involved with your money on a daily basis, since it can never be truly left in autopilot mode. If an investment, such as a mutual fund, hedge fund etc’ appears to be involved in something suspicious,  just sell it. Never just set and forget your investments, assuming that it will be taken care of by some financial guru. It is your money, and you make the ultimate decisions on your investments.
2. Conduct your research. If you are not financially savvy or do not have the time, make sure you have a financial advisor and accountant that you trust to help you make financial decisions. But even with the help of others, educate yourself on whether what you are being told has merit.
3. If an investment seems too good to be true, it probably is. In the above case, the fund was performing too consistently, over both times of prosperity and past recessions. This should have raised some red flags for anyone who wished to examine this investment objectively and practice due diligence.
4. Diversify your assets. Many investors forget, or usually ignore, this pivotal rule of investing.

It is an especially sad story because so many intelligent and trusting people were struck by it and, if any money is recovered, it is expected to be pennies on the dollar. We can just hope that people will really apply the above 4 lessons and that more oversight will prevent future fraud on such a massive scale.

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An online bank has several strengths and weaknesses you should consider when looking to choosing your financial accounts. Online banks usually offer the best savings accounts because they have low operating costs. However, online banks usually don’t offer much in the way of other financial products such as credit cards, so if you like having all your financial accounts at one institution you might want to choose your local bank.