Guest Post: Is Your Investment Manager a Master of Illusion?
2012 Investment Tips for Medical Professionals by Tom Cleveland
[Editor’s Note: Tom Cleveland is an analyst and writer for Forextraders.com, a website that markets forex brokers (companies that help you trade foreign currencies, making bets on whether one currency will strengthen versus another.) He had a long career with Visa in which he worked on their cross-border payment systems. Like with many guest posters, I don’t necessarily agree with everything he says (and you won’t catch me betting on exchange rates), but I did particularly like his suggestion of keeping your advisor’s feet to the fire.]
The holiday season may be a time for merriment and party going, but it is also the time when investment portfolios must be reviewed for their performance or lack thereof in many cases. Investment managers have already prepared slick multicolor presentations that will espouse their greatness and excuse their underperforming whatever index they have chosen for comparative purposes. Studies have continually shown that over 70% of actively managed funds fall short in this respect, and only a paltry 7% of the manager community has delivered gains of 5% greater than the index of their choice.
Part of the reason for this tepid performance is due to the exorbitant management fees that are charged to these so-called “managed” funds, but the balance is often due to poor market timing. Recently an abundance of investment advisors were counseling their clients to withdraw from the market, convert their holdings to cash, and wait out this period of high market volatility due to the uncertainty in Europe. If you followed this advice, you would have missed the October rally, a 17% gain and more than the entire appreciation of the S&P 500 index for this year.
The fact of the matter is that volatility in our financial markets will be with us for some time to come [and has been for decades- Editor]. The IMF has been reporting for the past few years that forty years of outsourcing has drastically modified the growth demographics of global commerce. These trends will continue, at least until 2020, bringing with them more uncertainty and volatility as wealth redistribution forces continue to reshape the way the international marketplace operates.
A future scenario such as this has made many question whether a “buy-and-hold” investment strategy still makes sense during this new era of globalization. [Not me- Editor] This type of environment is tailor-made for those that have a trader’s mentality, but for professionals in the workplace, the time necessary for prudent day trading is neither available nor an alternative worthy of consideration.
As for the year ahead, what are a few suggestions that are worthy of consideration?
- First, hold your investment manager’s feet to the fire. You are paying him good money to deliver stellar results. Take his asset allocation formula for the coming year and set up a mini-fund of your own with shares in appropriate ETFs that mirror his suggestions for the mix of your portfolio. You will have your own index for comparative purposes that will keep you abreast of how the market is actually behaving on a monthly and even daily basis;
- If this exercise is too time consuming for you, then stress the need for “process” tools, like timing and diversification, to your manager. Have him demonstrate his technical prowess at timing new additions to your holdings, pruning laggards, and modifying your risk profile for the road ahead;
- Financial news channels are screaming that Europe is a disaster area and that emerging markets, a favorite sector for years, are slowing down also. [On the other hand, what do you suppose the track record is for financial news channels?- Editor] What has been lost in the muddle is that the United States is staging a moderate recovery of its own, bolstered by increasing GDP growth, increased retail spending by consumers, and corporate profits that exceed pre-recession levels. Be selective in domestic companies and avoid those that are overexposed to Europe [Alternatively, you could rebalance to your fixed asset allocation and avoid market-timing- Editor];
- An improving situation in this country can also lead to an appreciating Dollar. Ask your advisor about hedging foreign exchange risk since many experts expect the Dollar to strengthen on the order of 10% over the coming year [Ask your doctor if forextraders.com is right for you- Editor].
You must perform daily at a high level. Demand the same from your investment manager.