Last month, I appeared on The Willis Report with Gerri Willis on Fox Business News.

The segment was too short, and I didn’t get to say everything I thought was truly important about the topic at hand: The Madoff Ponzi scheme.

December 11, 2013 marked the five-year anniversary of the arrest by federal authorities of Bernie Madoff. Madoff was a financial advisor who ran the biggest Ponzi scheme in history, defrauding investors out of tens of billions of dollars.

[ad#Google Adsense 336×280-IA]Willis asked me what red flags investors should look for to avoid being taken by a Ponzi scheme or other investment fraud.

Sometimes, it’s hard to come up with the right answer on the spot on live TV.

I wasn’t satisfied with the answer I gave.

So I’d like to give you my fully thought-out answer now.

It’s very important, and it’s not something you’re likely to hear anywhere else…

There are three parts to avoiding financial frauds…

First, you should put the bulk of your stock-market money into a low-cost index fund, like the kind sold by money management giant Vanguard. The fees are some of the lowest in the industry.

Whatever the index does during the 10, 20, or 30 years your money is invested, that’s about how much you’ll make. Investing your money in index funds like Vanguard’s will keep it away from the source of many investment frauds. If you don’t have the time or interest in actively managing your money, this is a good low-cost way to invest for the long term.

Second, put any money not in a fund like Vanguard’s into World Dominating Dividend Growers (WDDGs). Longtime readers know WDDGs are the safest stocks on the planet.

These stocks are at the top of their industries and have a proven track record of performing well for decades. That’s because they have one job: To pay you dividends and compound your money year after year after year. Keeping your money in your own account and investing in WDDGs are two of the easiest steps you can take to avoid fraudsters and scammers.

Third, avoid financial planners and advisors who make money by putting your money into investments. As a group, licensed, trained financial planners and advisors have failed America’s investors.

These people are little more than a sales force, trying to gather assets so they can charge exorbitant fees. And not only do they charge too much as a group, but the vast majority of the investments they put your money into will trail the market return you’d get with a Vanguard S&P 500 Index fund.

Vanguard will charge you 0.19% per year, on average. The rest of the fund industry will charge you 1.11% per year, on average (using 2012 figures from Vanguard’s website).

So they’ll charge you almost six times more on average… and likely not even earn a market return.

(For a great discussion of why you should avoid “financial helpers,” read pages 18 and 19 of super-investor Warren Buffett’s 2005 annual Berkshire Hathaway shareholder letter.)

The Bernie Madoff scam happened because the United States’ financial-services industry – Wall Street – is itself something of a giant scam. It’s a giant army of “financial helpers,” charging fees and creating no value. (Although in Madoff’s case, he was actually lying about numbers.)

On average, the financial-services industry must necessarily destroy the value of your investments. The reason for this is simple…

The most you can ever make owning stocks – or any other business – is all the excess cash generated by that business over its lifetime.

Beyond the basic brokerage function of helping investors buy and sell stocks in a liquid trading platform, there’s little anyone can do for you except get out of your way and let your stocks do their job of compounding your money.

Good stock pickers are exceedingly rare. So as a group, it’s impossible for tens of thousands of financial advisors and planners to do any better than a market return (minus their often exorbitant fees).

That’s it. That’s all there is to it. Put most of your money into a good index fund, buy WDDGs with the rest, and avoid financial planners and other expensive investment schemes.

If you do those three things, you’ll avoid exorbitant fees, make a good return on your money over the long term, and avoid the fraudsters and scammers like Bernie Madoff.

Good investing,

Dan Ferris

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Source: DailyWealth