As you read stories about victims of the Madoff fraud, aren't you glad that you weren't one of them? Why are you so sure that it will never happen to you? How do you know its not happening to you now?

In academic financial research, there's a concept called "agency risk." Agency risk occurs when someone who is acting as your agent has a set of interests that conflict with yours. In investing, agency risk is rampant because one party can often gain from an action that will cause a loss to the investor without the investor even knowing it! Bernie Madoff was an agent of the investors who hired him to manage their money and he was crooked for years until his scheme ended. But investors face plenty of legal, yet sometimes equally dangerous forms of agency risk. It is important to understand them and find ways to mitigate these risks.

Continue reading Is there a Bernie Madoff in your portfolio?

Is there a Bernie Madoff in your portfolio? originally appeared on BloggingStocks on Mon, 06 Jul 2009 13:20:00 EST. Please see our terms for use of feeds.