2008 in the Financial Markets: When Even the Frausdsters are Found

In the financial industry there is a practice of requiring that employees take 2 consecutive weeks off each year. I believe European and Asian banks still prescribe this. It’s not that the banks are so concerned with your rest, but that a worker might be able to maintain a fraud (like keeping fake books) for one week, but not for two. Well it appears that this particular financial crisis has been so severe, that even the biggest of the Ponszi schemes has been exposed. I am boggled by the size of the fraud. Perhaps going forward we will refer to large scale investment schemes as Madoff schemes.

At turbulent times like this, it helps to pause a bit and reflect on what’s happened as well as to double checking to make sure the investment portfolio is properly positioned. This is what I am planning to do in the next week as I set up my investment strategy for 2009:

1. Allow yourself to mourn or feel angry over last year’s losses in the investment portfolio. After all, for most of us, it was hard earned and saved money.
2. After mourning, take stock of current investments, investment managers, and exposures (country exposure, industry exposure, etc…)
3. See if there are any large risks that can be mitigated, such as too much exposure to one bank, etc…
4. Remember that investment is about doing the opposite of how you feel: the best days to invest are when you are feeling pessimistic, the worst are when you are feeling optimistic.
5. If your investments are in sound, diversified portfolios, (such as diversified mutual funds) do not do too much tinkering. What goes up, does come down, but the opposite also happens.
6. If your liquid available funds are low (like emergency fund), build that up first so that you aren’t forced to sell investments in a bad market.
7. Remember there’s no such things as a free lunch.

OK,  the last point is something a former economics professor used to say all the time.  As I get older, I think I am beginning to understand the dimensions of what he meant.