Dear Penny: How Can I Recover After Losing Big Money to a Ponzi Scheme?

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Dear Penny,

How does one recover from investing in a Ponzi scheme? I am feeling very stupid and embarrassed. The SEC will take two to three years to figure out and recover any funds remaining. I have additional funds to reinvest, but it is money I want to leave my daughter. What advice do you have for me?


Dear A.,

Plenty of smart people have fallen for Ponzi schemes, so I hope you’ll eventually be able to move past the shame you’re feeling. If anything, take comfort in the fact that you didn’t put all your eggs in that proverbial too-good-to-be-true basket.

For readers who may be unfamiliar with the term, a Ponzi scheme is a type of investment fraud where investors get paid from the money new investors pay in, rather than from the gains the fraudster claims the investments are earning. The scheme collapses when too many people try to cash out at once. That’s what happened when Bernie Madoff’s investors attempted to withdraw $7 billion within a short window in 2008, during the financial crisis.

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As you point out, the process of recovering money can take years. Unfortunately, there’s no guarantee that you’ll recover anything. If you do recoup some of your money, expect it to be significantly less than what you initially invested. So I think this is a situation where you hope for the best but assume the worst, which is that you won’t get any of your money back.

You’ve obviously reported your losses to authorities, as anyone in this situation should do. The best thing you can do is look back at what lured you into this fraud. Are there any red flags you can identify now in retrospect?

For example, Ponzi schemes often promise huge returns with little to no risk. Or they claim they can keep churning a profit year after year, regardless of what’s happening in the market. But the truth is, it’s impossible to earn outsize returns quickly without taking substantial risks. And anyone who tells you about an investment that never drops in value, at least temporarily, is lying.

Don’t try to make up for your losses by chasing fast money. Seeking big returns will leave you vulnerable to losing even more money — either from another scheme or by choosing highly risky investments.

Accept the fact that most fortunes are built slowly. Skip any investment that comes with a sales pitch. Instead, invest in an S&P 500 index fund, which is the most surefire way to amass long-term wealth on the planet.

The S&P 500 index represents more than 80% of the U.S. stock market by market capitalization. It’s often used as a benchmark for the entire U.S. stock market. The goal of investing in an S&P 500 index fund isn’t to achieve market-beating returns; it’s to mirror the performance of the 500 stocks in the index as closely as possible.

The average pre-inflation gain of the S&P 500 index is about 10% annually. Some years, the returns will be negative. But in 41 of the past 50 years, returns have been positive.

Those good years have translated to some stunning returns over long stretches of time. If you’d invested $10,000 in an S&P 500 index fund 20 years ago and never added a cent, your investment would be worth over $50,000 today.

I say all of this assuming that your daughter is an adult who doesn’t have a disability that requires long-term financial support. If your daughter is a minor, using some of the money you have to buy term life insurance is a must. If she has special needs that preclude her from working, a permanent life insurance policy that offers a guaranteed death benefit may be a worthy investment. But otherwise, I’d steer clear, given the extraordinarily high cost.

As long as your daughter is a self-supporting adult, take care of your own needs first. If you might need any of the money you plan to reinvest for basic living expenses, avoid putting it in stocks. Even a reliable investment like an S&P 500 fund can fluctuate significantly in the short term. A common rule of thumb is that money you may need within five years doesn’t belong in the stock market.

No matter how much you’re able to reinvest for your daughter, consider giving her the gift of your wisdom. Although you’re embarrassed about falling victim to a Ponzi scheme, think of whether there are any lessons you can offer. Is there anything you wish you’d known when you invested? What warning signs would you want your daughter to look out for?

Every single one of us has made mistakes with money. So please try to forgive yourself. If you can move past your embarrassment and talk honestly about this painful lesson, your daughter and others will benefit.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to  or chat with her in The Penny Hoarder Community.