Bernard Madoff was only exposed when the market melted down to the point where it was impossible for him to hide the fact that he wasn't really generating investment returns at all.
A pyramid scheme always requires fresh cash coming in from people at the bottom to soothe the people closer to the top. When the 2008 crash got in the way of that flow, the whole system stopped working.
Older clients had a rough year along with the rest of us. But their kids and grandkids were paying attention. And they learned the lesson.
I saw a lot of young workers scared out of the market entirely in 2008-9. In hindsight, the crash wasn't the real problem. They didn't have a lot of skin in the game at that point anyway.
A few thousand dollars in a 401(k) isn't real money unless you get laid off and need to cash out. Watching that nest egg shudder with market volatility becomes a completely abstract experience when you're 40 years from retirement . . . it's all just numbers.
The numbers healed because most of these people weren't Madoff clients. At this point all 401(k) balances that weren't liquidated to pay the bills have recovered and are back on long-term track.
However, all of these people were watching the headlines. They can look at their own balances but remember their formative years when a scam artist was able to skim billions of dollars out of vulnerable investors more or less like them.
The line between Madoff's activities and everyday managed assets was never effectively explained. It all looked a little nebulous from the outside.
I think that was the moment the index funds inherited the earth. If it's all a random walk, you learn to value transparency. Eliminate the human element. That's what lets you down.
They wanted annuities in their 401(k)s and needed convinced to even look at the index funds. They're a decade older now. Their mindset hasn't really changed.
Bernie Madoff turned an entire generation onto annuities. They want safe, reliable, guaranteed returns. And they'll run the market when we're gone.
