The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

INTRODUCTION

When the stock market crashed on October 2, 2008, sending the Dow Jones Industrial Average down 348 points to 10,483, far from its high of 14,164.53 on October 9, 2007, a friend whom I'll call Susan said she felt happy to have all her money invested in a safe place where it wasn't affected by market turmoil. "I don't know how Bernard Madoff keeps producing these returns," she said then. "He's magic."

In January 2009, I met Susan, sixty, for coffee. She had lived a comfortable but not ostentatious life with the proceeds of her trust fund until she learned on December 11, 2008, that Madoff allegedly lost $51 billion of client money in a Ponzi scheme. "I'm a crook," Madoff told FBI agents. He claimed he worked alone to bilk investors, charities, banks, and other entities around the world. Since then, it's become clear that he had help. Susan lost her regular income plus the $5 million inheritance left by her father. She had about $6,000 in her checking account and no work experience.

Now she knows how Madoff produced magic: He recruited new investor money to send to earlier investors, pretending it was a return on their investment. To make his scheme work, he had to have a constant flow of fresh money to send to previous investors, claiming it was "income." Securities examiners say there is no evidence that Madoff invested or traded any of the $50 billion that he claims he collected in his Ponzi scheme. When the market began to sink at the end of 2007, Madoff investors began ...