LINDA WERTHEIMER, Host:
It's been a horrible year for investors. Many people's savings and retirement money lost. After a year of Wall Street meltdowns and, more recently, the Bernard Madoff alleged Ponzi scandals, many investors have also lost confidence. We spoke to Knight Kiplinger about who we can trust when it comes to investing money. He's editor-in-chief of Kiplinger's Personal Finance magazine. Welcome to the program.
KNIGHT KIPLINGER: Linda, nice to be with you.
WERTHEIMER: Thank you. I would imagine that quite a few people are thinking that the best place to park their savings may be under the mattress. Is that the best place to put money, for the time being at least?
KIPLINGER: No it isn't. Who do you trust? There are a lot of institutions and individuals whom you can trust. But in any organization there can be rogue individuals embezzling money. But you can minimize the risk by dealing with well-established, reputable institutions. So there are alternatives to the mattress. Federally-insured deposit institutions are safe. Money market funds are safe, with the federal government now standing behind them. The large mutual fund companies with decades of integrity behind them.
WERTHEIMER: But that is a big question right now, is trust, isn't it? I mean, Bernard Madoff was not a high-flying money manager promising, you know, 25 percent returns. He was slow, steady, that was his reputation. If he's now charged with running a Ponzi scheme, how do we, you know, how can we be sure about money managers? How can you check up?
KIPLINGER: You check up by finding out first if they are audited by a major accounting firm. Madoff was not audited by a major accounting firm; It was a hole-in-a-wall firm. There was no custodial company, an intermediary to whom you gave the money and from whom you received the statements. He didn't have a custodial firm. You should never accept that. You should find out who is actually holding your funds, not the manager himself.
WERTHEIMER: One of the things that, you know, when you start reading the accounts of people who were injured by Mr. Madoff, they apparently had everything that they had with him, and they've lost it all.
KIPLINGER: Many of Mr. Madoff's customers and clients ignored principle number one of investing, never put all of your assets into a particular investment. It's OK to have all your money with a mutual fund family, but within that family the money should be spread over a variety of funds - stock funds and bond funds, perhaps a commodity fund. Some thought they had diversification within Mr. Madoff's organization, but in fact it was not.
WERTHEIMER: So, where would you put your money right now?
KIPLINGER: Right now the best long-term opportunities, I think, are in the stocks of big, multinational American companies for a long hold, a three to five year horizon. I have always dealt with large, national, reputable, mutual fund families. It doesn't mean that their investment picks are going to be better than somebody else's, but the risk of misallocation of your funds from the major mutual fund companies, and you know what they are, they're Vanguard and Schwab and T. Rowe Price and Fidelity, companies like this. Actually the small investor is less at risk if he deals with large companies like this, than the big investors who thought they were smarter than anybody else. They didn't do due diligence. Actually, rich people don't do their own due diligence. They think somebody else is doing it for them, and in this case, nobody was.
WERTHEIMER: Thanks very much. Appreciate your coming in.
KIPLINGER: Thank you, Linda.
WERTHEIMER: Knight Kiplinger is editor-in-chief of Kiplinger's Personal Finance magazine and The Kiplinger Letter.
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