Fool's School

It's 150 years in prison for Ponzischeme mastermind Bernard Madoff. What can we average investors learn from the Madoff story? Plenty.

First off, Madoff is a great reminder that things that seem too good to be true probably are. Madoff reportedly promised some investors returns of up to 46 percent per year. If anyone ever suggests that you might count on earning that much, don't believe them! The stock market doesn't work like bonds or CDs or savings accounts. There is no promised return. In the short run, returns tend to depend on factors such as the economy, investor psychology and the like. In the long run, they're tied to the performances of the companies in the market. Madoff is now famous for having delivered returns that were rather consistent — around 10 percent, take a percentage point or two, each year. That should have made his investors suspicious.

After all, when you look at the past 15 years of returns for the S&P 500, you see huge jumps and dives. The index lost money during four of those years, including a 37 percent drubbing last year. It also gained more than 20 percent over each of six years.

Another lesson is to not have most or all of your money tied up in any one thing. Diversify. You needn't own hundreds of stocks. Just eight to 15 or so can be enough, as long as they're distributed among different industries and maybe even a few different countries. It appears that many Madoff victims left the lion's share of their wealth in his hands. That's always risky, no matter how much you trust someone.

Add some bonds to your mix, too, especially as you near retirement. Money you need within the next few years shouldn't be in stocks, because years like 2008 can happen at any time, and they can make you poorer even without the help of Bernie Madoff.

A good defense against losing money is to educate yourself. Learn more at www.fool.com/investing.