It was early on a Thursday morning when Mike and Connie King watched a documentary on Bernie Madoff, the notorious criminal who stole billions of dollars from investors. He was the king of the Ponzi scheme.
A Ponzi scheme is simple.
· You invest money with someone.
· They put the money in their own bank/investment account to spend on themselves.
· If a client wants a small amount of money he just pays it out of his bank account.
· If too many people want their money back the whole thing falls apart.
They’d been having breakfast in their kitchen with the TV on and discussing plans to play pickleball doubles with friends when the documentary grabbed their attention. Afterward, Connie was worried.
She turned to Martin and said, “We have all our money with a financial advisor too! It all seems so easy. All Bernie Madoff had to do was fake statements. He took all of those people’s money.”
“Honey, remember. We talked to our advisor about this exact concern. He explained how we were fine,” comforted Martin.
“How do we know he wasn’t lying? Bernie made everything look fine too. He faked statements, Martin, for years,“ Coretta said.
“Our advisor told us that our money was held at a bank, TD Ameritrade. We get statements from them every month and they have online access. It seems pretty legit to me,” responded Martin.
Coretta was not feeling any better. “I saw a TD Ameritrade branch over in Shelbyville. I’m driving over there now.”
Martin and Coretta raced over to the bank. As they got up to the teller, Coretta said, “We wanted to check on our account.”
“Of course,” replied the clerk. She pulled up the account and gave her a statement. It looked exactly like the ones she saw in the mail.
“Have you heard of any financial advisors running away with people’s money?” Corretta asked sheepishly. The teller looked confused. “I’ve never heard of that before.”
Martin and Coretta went out to lunch at Chick-fil-A. “Do you feel better?” asked Martin.
“I guess so,” answered Coretta. She was now thinking about all the ways she could lose her money.
“I know TD Ameritrade is a big bank and everything, but what if they go out of business?” Coretta sighed.
So Martin and Coretta went back to the bank again (Martin was getting a little frustrated). Coretta went up to the same teller and asked, “What happens if you guys go out of business? Do I lose all of my money then?”
This woman is pretty paranoid, thought the teller.
“No need to worry,” said the teller. “Brokerage firms and banks very very rarely have problems. Maybe once every few decades. And even if they do, you are not risking anything.
“Think about it this way. If you have stock certificates inside a safe deposit box inside a bank, what happens if the bank goes out of business? Do they open all the safe-deposit boxes and steal the contents? No. The owner of the safe deposit box goes into the bank and removes the contents. Your stocks are no different. They are held separately from the bank’s assets.”
Coretta breathed a deep sigh of relief. But as they drove home from the bank, Coretta couldn’t get the nervous feeling out of her chest.
“Maybe our investments are safe, but that still doesn’t mean we couldn’t lose our money if the stock market crashes,” Coretta said.
Martin, gripping the steering wheel tightly, responded, “Our advisor has been that through, too. Let’s go home and re-read one of his newsletters.”
So that is what they did.
Their advisor fancied himself an economic historian and often pointed out long-term historical results that were hard to ignore.
“Coretta,” Martin reassured his wife. “We have about half of our money in bonds and half of the money in stocks. Remember he told us that whenever stocks go down, bonds go up. Let’s look at his charts again.”
50% Bond Aggregate Index (thousands of U.S. bonds)
50% S and P 500 Index (the 500 biggest companies in the U.S.)
“That doesn’t seem too scary. I know we can’t guarantee the future but even during 2008, we would have only lost 20%. We’ve made a ton of money otherwise. Look at that! It’s only gone down three times in thirty years. We need to hang in there. Our advisor is right. The only way to be financially successful in retirement is to invest in stocks and bonds,” said Martin.
“Ok, I feel better, “Coretta said. “Let’s go play pickleball.”