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It may be true that everyone who invested with Bernard Madoff without knowing the extent of his scheme was a victim, but some investors have profited from Madoff’s plan. For example, assume an investor gave $1 million to be invested in Madoff’s fun in its earlier years. A few years later, but still early in the life of the pyramid scheme, the investor’s statement from Madoff might have valued the “investment” at $3 million. The investor decided he needed to cash out, collected the gain of $2 million, and left $1 million in the fund to earn more money.
A this point, there were enough new investors to pay for the occasional withdrawals of earlier investors. The gain of $2 million didn’t come from appreciation of an asset, simply deposits from new investors. Keep in mind I’m using fictional numbers here to illustrate the point. Let’s say that in March 2008, Madoff’s statement to this investor valued his portion of the fund at $5 million. This is still before investors discovered the fund was a pyramid scheme. Now, this $5 million is “lost.” The investor is considered a “victim” of Bernard Madoff, and victims are now filing with the Securities Investor Protection Corp. (SIPC) to get back the money they “lost” (up to $500,000).
Even though he didn’t know it scheme, this investor benefited from the pyramid scheme. He gave Madoff $1,000,000 and received $2,000,000 in return, without an underlying appreciation on an asset. This “victim” is actually came out ahead.
Lawyers are encouraging Madoff’s investors to do some math before filing a claim with SIPC.
“I had a call yesterday from a guy who said, ‘I’ve taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?’” said Steven Caruso, a New York attorney specializing in securities and investment fraud…
Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.
The courts can rule that investors who profited in the earlier days of the fund can be required to pay back these “profits.” But most, if not all, of these investors did nothing wrong other than not questioning the underlying investments of the fund and ignoring the secrecy shrouding Madoff’s investing techniques. These investors included public pension funds.
What would you do if you were an early investor who withdrew more than you invested and you believed you still had money invested in Bernard Madoff’s fund? Would you file a claim with the SIPC to receive as much $500,000 if your latest statement indicated you had more? Would you stay under the radar and not advertise to the SIPC that you profited from this mess?
Madoff ‘victims’ do math, realize they profited, David B. Caruso, Newsweek, January 8, 2009
Jeremy Siegel, author of The Future for Investors and Stocks for the Long Run believes that the economic recovery will be faster than expected this year. Siegel has been criticized in the past for being overly optimistic, but he may be right considering stocks don’t have to perform well this year to improve over 2008.
The U.S. economy will recover faster than expected. Unquestionably, the last quarter of 2008 and the first quarter of 2009 will show a significant decline in GDP. But I think the decline in those two quarters, which some are now predicting to be -7% and -5%, respectively, will be milder, and the second quarter might surprise with an uptick. This more optimistic forecast is based on low mortgage rates stabilizing the housing markets and increased lending by banks.
Equity markets will enjoy returns of 20% or higher… U.S. Treasury bond yields will rise over 3% as the economy improves.
A 20% return in the S&P 500 from December 31, 2008 to December 31, 2009 would be a welcome improvement. If this year plays out to be one of recovery in the stock market, then it would make sense to invest more in the beginning of the year to take advantage of as much as the upside as possible. My 401(k) doesn’t work this way; every two weeks, I invest roughly the same amount of money, so I’ll be dollar cost averaging as the stock market increases. For my SEP IRA, and Roth IRA if I qualify or Traditional IRA if I don’t, I’ll likely invest a lump sum in April. I may reserve a portion of that in a money market fund, so I can continue to invest periodically.
Are you planning for a recovery in the stock market this year?
Economic and Market Commentary, by Jeremy Siegel, January 2009
If you contribute to a 401(k) plan, you may be happy to hear that this year’s contribution maximum is increasing. In 2008, the tax code allowed employees to contribute up to $15,500. Anyone who turned 50 years old in 2008 could also add a catch-up contribution of $5,000 above this limit, bringing the maximum to $20,500 for these employees.
In 2009, the basic maximum for 401(k) contributions is $16,500. Employees 50 and older can add an additional $5,500. These limits take your pre-tax, after-tax, and Roth 401(k) contributions into consideration, so the sum of all your 401(k) contributions in 2008 cannot exceed the limit for your age group.
I fell short of contributing up to the maximum in 2008, but only by about $1,000 or $1,500. That’s mainly due to bad planning and changing my contributions throughout the year. The other danger is to set your contribution rate too high and miss out on the employer matching contributions. My new contribution rate for 2009 is set to bring me to the maximum based on my current salary.
In this economy, though, anything can happen. I may receive a substantial raise or I could be laid off. I can only plan using the knowledge I have right now.
Related: Roth IRA Conversion and Traditional vs. Roth IRA: An Introduction and Comparison
The total contribution limit for IRAs is not changing in 2009. Just like 2008, the maximum you can contribute to your IRAs across both Traditional and Roth types is $5,000. Anyone who becomes 50 years old this year has a higher maximum of $6,000. Keep in mind that this maximum is across IRA types, so if you’re 49 years old and have already invested $4,000 in a Roth IRA, you can only add $1,000, whether the amount is invested in a Traditional IRA, Roth IRA, or split between the two.
The phase-out ranges for Roth IRAs change this year. If your modified adjusted gross income (MAGI), a specific calculation on the 1040 tax form, is above $105,000 for single filers or above $166,000 for those who are married filing jointly, your maximum allowable Roth IRA contribution begins to reduce to zero. If your MAGI is above $120,000 (single) or $176,000 (married filing jointly), you do not qualify for Roth IRA contributions.
If you haven’t contributed to your 2008 IRA, don’t panic. You have until your tax filing deadline to fund your 2008 IRA. I haven’t contributed to my 2008 Roth IRA yet. I need to calculate my MAGI first in order to determine my maximum contribution amount.
I do not have any children.
I am, however, planning to have children at some point in the future. It is part of my long-term vision for my life, despite endless stories from co-workers who seem to have such a difficult time with their own. (These stories are always followed by a confession that they are glad they had children anyway, etc.)
A frequent Consumerism Commentary reader, someone close to me, read my articles about my plans for charitable contributions and offered some advice, paraphrased here.
I see from your web site that you are contributing a significant amount of your salary to charity. While laudable, have you thought clearly about this? One of the big mistakes I made was not to put money away for my children’s education. Not only did the loans end up being a burden on their Mother and I, but on them as well.
How may years have you been paying off college loans? Don’t you think that your life would be different now if you did not have to worry about college cost. If I were you, I would consider starting an education fund. There are tax benefits and other advantages and disadvantages to consider. Imagine the relief of not to having to worry about your eventual kid’s education.
I’ve always believed that parents should take steps to ensure that their children do not have to burden themselves with excessive work while attending high school and college in order to pay for their own education. While some “ownership” of their education might be a good thing, possibly motivating them to not waste their own money, I think that this is a time when students need to be full-time students without distractions, especially those causing unnecessary steps.
I want to be able to provide any educational opportunity for my future children. The most popular account type is the “529 Account,” named after the tax code that allowed its creation. The 529 Account would allow me to maintain control of the funds, even after the hypothetical children turn 18 or 21 years old. The investments would grow tax free. As long as the funds are withdrawn for qualified education expenses, I would avoid federal tax, possibly state tax, and any penalties.
The only downside is the chance that I don’t have children or my kids decide not to attend college. I would be able to withdraw the funds from the 529, but I will owe tax on the earnings and a penalty fee. The other option is to name another family member as the beneficiary.
The 529 appears to be the best choice for investing for education, but I’d like to have a more definitive plan on the issue of having children, particularly pertaining to the timing. (I would say right here that I should probably be careful what I ask for.) If anyone else asked me, I would say it’s never too soon to start investing for the future education of children who are merely hypothetical, but a potential 10% federal penalty tax does not seem inviting.
To the reader’s question about investing for education versus charitable giving, I would like to do both. I guess I should work harder now, while I have fewer “life” responsibilities, to try to build up more income to cover as many bases as possible. Even if I don’t open a 529 Account right away, I can designate a certain amount of savings each month towards this goal.
Photo credit: CarbonNYC
Over the last 36 years whose first five days resulted in a stock market increase, 31 of those years experienced an overall good year for stocks. While that’s a good track record, it’s not an infallible indicator. There are three trading days left in 2008, a lost cause for the stock market.
This method has an 86% success ratio. Will you make any investing decisions based on the market’s performance during the first five trading days of January?
Here is how a Ponzi scheme works. The individual running the scheme promises abnormally high returns over a short period of time to the initial investors. These investors provide the start-up capital, and the schemer will do whatever he likes with that money, either invest it, spend it, or let it sit in a bank. Subsequent investors brought into the scheme will provide money, some of which will go to the initial investors in the form of “returns.” Subsequent investors directly fund the returns of the previous investors.
This is surprisingly sustainable for a long period of time, despite an increasing amount of required new investment. If investors are persuaded to reinvest their “returns,” very little money is handed to the investors.
Bernard Madoff, in the news lately, allegedly operated a Ponzi scheme like this. Despite years of warnings provided to the SEC, he wasn’t arrested until recently. Many smart investors fell for the scheme and lost millions of dollars. More than half of the $14 billion (as of November 1, 2008) managed by one investment advisory, the Fairfield Greenwich Group, was invested in Madoff’s securities, and they stand to lose the entire investment.
According to FGG, the company performs due diligence on their investments, including evaluation of portfolio, investment performance, and financial risks. That’s the first category of due diligence listed on their website. Madoff’s investments did not include details on the holdings, so that should have been a sign to look elsewhere.
FGG might not be a victim, however. The New York Times describes how Fairfield executives benefited greatly from the relationship with Madoff and were not shy about their newly found wealth.
As an individual investor, the chances of getting caught up in a Ponzi scheme are low, particularly if you stick with well-known mutual funds, stocks, and bonds. If you are interested in private investment opportunities, know exactly what you are buying before you hand over any money.
In the sea of cubicles in my office, two of my coworkers were talking yesterday about their investments. As stocks — primarily our company stock — have increased a little from their recent lows, they seem to believe that this might be a good time to increase 401(k) contributions and enroll in the company stock purchase plan. One of the coworkers is my age and probably has about 30 years before retirement and the other coworker most likely has about 15.
I agree. Giving stocks decades to grow is probably a solid strategy. Some expert financial advisers are calling for more tragedy in stocks for the next year, however. “Dow 4,000″ is a phrase I’ve seen thrown around quite a bit. I do believe that people tend to predict numbers too low for the lows and numbers too high for the highs, but it’s hard to determine which predictions are overblown. A survey of chief financial officers shows that 60% of the sample don’t expect the economy to recover for at least a year. The survey was conducted by the Duke University’s Fuqua School of Business and CFO Magazine, who claim CFO predictions have proved to be accurate. With that in mind, the fact that CFO’s confidence in the economy is the lowest it has been in the 12-year history of the survey is a little disheartening for anyone who is looking for stocks to recover soon.
I recently increased my 401(k) contributions to 50% of my salary — the maximum deferral rate — to come closer to taking full advantage of the investment opportunity. I’ve also been investing 10% of my salary in the company stock purchase plan, as I have been since the plan was initiated. I’m happy to continuing buying into the stock market while the prices are lower than they have been in the past few years, I’m hoping that I’m giving myself enough time for the stocks to increase above inflation.
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