Most of us did not get directly burned by the Madoff fraud. We are not Kevin Bacon or Steven Spielberg. We are not Palm Beach matrons. We didn't run multimillion dollar hedge funds or charities. But investment fraud doesn't always target the rich. Just the opposite. Small, less sophisticated, investors are usually its victims.

How can you protect yourself from losing everything when you invest? There are a number of ways, some of which sound like clichés. But clichés are clichés because they tend to be true. For example: "Money doesn't grow on trees." Something to remember when you invest. Here are some pointers to help you invest safely.

  1. Don't put all your eggs in one basket. In other words: "Diversify." This applies not only to what you invest in, but who you invest with. Many Madoff investors gave him their life savings. Now they have nothing. If something goes wrong or the sector you invested in takes a tumble (financials, real estate), the impact will be less severe if you have your investments spread around. A number of web sites have simple tests you can take to see what your risk tolerance is and suggestions on the types of portfolios that might be right for you that will help you diversify. Google: "investment risk tolerance test."
  2. If it sounds too good to be true, it usually is. Don't be fooled by promises of high returns at little or no risk. Promises of returns of 10, 20 or 50 percent per quarter, or with some scams per month, when other investments are paying 2 to 5 percent per year, should make alarm bells go off. Generally, the higher the return, the greater the risk. Be wary of claims that investments are "guaranteed" or "risk free." The only investments that are risk free are U.S. Treasuries or bank accounts insured by the government through the FDIC. And don't borrow to make an investment. I cringe when I hear about investors who borrow on their credit cards (at 19 percent!!) just to invest in some scam that was "too good to be true."
  3. Beauty is only skin deep. Don't be fooled by glossy brochures, fancy websites or celebrity endorsements. Check out what's being promised. Review the company's financial statements. Make sure everything regarding an investment is in writing. Securities brokers and investment advisors have licenses. See if who you are dealing with does and whether they or their company have had problems with regulators or other investors. Websites abound with information that can be easily accessed. Besides a Google search, the SEC's website, www.sec.gov, has a wealth of information for investors about investment scams to avoid and how investors can check out brokers they are dealing with or investments they are considering. Other good sites include those maintained by the North American Securities Administrators Association, www.nasaa.org, and www.investoreducation.org. Also check with your local Better Business Bureau to see if there is a history of complaints.
  4. Only fools rush in. Don't be pressured into making an investment. Take your time to think and make sure the investment is right for you and your risk tolerance. Can you afford to lose the investment or suffer a thirty percent loss? Is the investment liquid if you need to cash out in an emergency? Be wary if you are told to keep the investment opportunity "confidential" or if you have to act "now."
  5. Look before you leap. Understand what you are investing in, its business, products or services. While you don't need a working knowledge of every business you invest in, you should have a basic understanding of what the business does and how it makes money, so you can judge its risks, potential, and if it is right for you. Avoid investments based on purported inside or confidential information, contacts or systems. If you didn't understand Madoff's "split-strike option conversion" trading strategy, it probably wasn't for you. Which, as it turned out, is a good thing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.