Evaluating your money manager
Let’s imagine that you’ve amassed a reasonable
nest egg for retirement, but you need someone to guide its investment. Your goal
is to achieve a respectable return on your money without taking large risks.
There are many money managers desirous of your business, so you decide to put
together a set of interview questions to see who you like best.
After considerable thought, you arrive at the following four questions:
1) Why should I place my money with you? Show me, in your historical testing
of your strategies and in your real-time performance, how you obtain returns
that are in excess of what I could obtain in risk-less investments or in simple
buy-and-hold stock and bond strategies.
2) Diversification has been called the one “free lunch” available to investors.
How do you utilize diversification to achieve superior risk-adjusted returns?
How do your returns correlate with those available in the stock and bond
markets?
3) Show me data on how your strategies perform under different market
conditions, the drawdowns I can expect, as well as the flat periods of
performance.
4) Markets are constantly changing. What, specifically, are you doing to stay
ahead of the curve? What major changes have you made recently to adapt to market
conditions and how do you track the success of those changes?
Your questions in hand, you’re now ready to begin your interviews.
Your first money manager interviewee comes through the door.
It’s you.
You are applying for the job of managing your own money.
You have to answer your questions and justify why you deserve your own
business.
Would you hire you to manage your money? If someone identical
to you–you with your work ethic, your objective trading/investing results, your
strategies, and your interview responses–approached you to manage your funds,
would you turn your money over to him or her?
If your answer is yes, congratulations.
If no, what steps would you need to take to
become worthy of your own business? Would you need to more clearly document an
objective edge in the market? Would you need to more consistently exploit a
demonstrable edge? Would you need better diversification and risk management?
Or, as someone already trading/investing
your own capital, are you in the wrong business altogether?
If you had a money manager investing a portion of
your money and achieving your results, would you hire that person to manage the
remainder of your capital or would you fire them?
Brett N. Steenbarger, Ph.D. is
Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY
Upstate Medical University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. His book, Enhancing Trader Performance,
is due for publication this fall (Wiley).