Question: How do I know if my investment firm is really doing a good job for me? When the market goes down, they blame the market. When things go well, they take the credit. How can I know if they are really doing a good job or not?
Answer: Perhaps the best place to start is to understand what your investment manager is not. There are many myths (some spoken, others merely assumed) about what an investment manager can do. It’s time to expose them as untrue.
An investment manager is not…
1. An Economic Alchemist. The ancient alchemist claimed to be able to turn a base (worthless) metal in gold. Nice work if you can get it. And there is no shortage of individuals today claiming to be, in effect, economic alchemists, producing financial gold out of economic lead.
Believing such mythology is certainly tempting, especially when times are tough. But when times are bad, they are bad. Yes, bad markets do affect your portfolio performance. The only way your investment manager could avoid this impact would be if he were…
2. A Profit Prophet. Reduced to the bare essentials, this is the claim to know the future (of markets anyway). Your investment firm may have an opinion about what next year, next quarter or next week holds, but that is all it is – an opinion.
Is next year going to be good or bad? Answer: yes, it is going to be good or bad. The problem is, we don’t know which one. If your investment manager could really know what next year holds, he both would soon be retired and you would be looking for a new investment manager. A lot of money has been lost mistaking last year’s lucky guess for prophetic powers. Good guesses have a way of averaging out with bad ones down the road.
3. A Money Magician. Many people have the idea that their money manager is going to be able to move money, as if by magic, from “somewhere bad” in the market to “somewhere good,” and at just the right time. While moving money around in a strategic fashion is often one aspect of good money management, it isn’t because the money manager was able to do so “in the nick of time,” right before the bad stuff occurred.
So if your money manager can’t tell the future or spin gold out of straw, what exactly are we hiring these people to do? It is my contention that a good money manager is really just…
A Financial Farmer. If I had said, “A good investment advisor job is to manage probabilities,” you would yawn and fall back to sleep.
But managing probabilities is exactly what a farmer does.
An excellent farmer may have poor results because he farmed during a draught period. Conversely, you might have a so-so farmer who farms when weather and soil conditions are 100% perfect. You would certainly have better results with the second farmer, but he cannot rightfully take credit for the results.
Think about the huge mistake you would make if you fired the first farmer (the better one) and kept the second (the lesser one) because of the results they had. The law of averages suggests the circumstances could soon switch: perhaps next season the good farmer would the favorable conditions and the poor farmer would get the crummy conditions – what a disaster if you’d chosen to switch the year before.
A good farmer does everything in his power to prepare conditions so both soil and seed stand the greatest chance of producing a healthy crop. He can even help nature along through advanced agricultural techniques. But in the end, though, he is greatly affected by the hand Mother Nature decides to deal him.
My advice is to know what your advisor is doing to put the odds in your favor and judge him on his success at doing that.
Expecting something else sets you up for poor results and a poor decision about what to do next.
-Byron Moore, CFP®
Managing Director, Planning Group, Argent Advisors, Inc.
The views expressed in the preceding commentary do not necessarily reflect the views of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.