I don’t know about you but I have a terrible track record when it comes to investing in the stock market. I do my research, I read the Wall Street Journal and the financial Times, I even watch some of those financial news shows on TV and whenever I think I’ve finally got a good stock to buy, it almost always tanks on me!
The fact of the matter is, investing in the stock market is incredibly difficult. The people that work on Wall Street are some of the smartest people in the world. That may be hard to understand and maybe even hard to believe, but it’s true. The math involved in finance is incredibly complex and in fact many investment banks have entire divisions made up completely of mathematicians and physicists all at the PhD level.
We just can’t be expected to compete against people like that who spend their entire lives day after day finding scientific ways to make money on the stock market. But what we can do is hire a good money manager ourselves. Picking a good investment adviser or money manager is incredibly important because your stock market investments will be the core of your retirement account and will determine how well you will live when you retire, and even if you will be able to retire at all!
Okay, so you’ve got yourself a money manager… how do you know if they’re doing a good job? Sometimes its not as easy as simply looking at your statement at the end of the month or at the end of the quarter because these things can be deceptive and at best are hard to understand sometimes.
And it’s not as simple as simply looking at their past track record. If that was the case everyone would be rich because we would just find the money manager who has the best past performance and everyone would give them their money. Obviously this doesn’t happen.
I believe there are four or five main things you should look at when evaluating your money manager. If any of these things are out of whack, you should start looking for a new money manager or investment adviser
These four things I like to call the 4 P’s, and they are performance, process, personnel, and philosophy.
Performance is very easy, it’s simply their long-term track record and whether or not it has beaten the S&P 500 and by how much.
Philosophy is a little trickier. Everybody thinks about the stock market differently and I want a money manager who thinks about stock market like I do not somebody who’s looking for a get rich quick stock to pump and dump. We’re looking for long-term steady growth here.
Personnel is easier to quantify. In this day and age of interconnected fast-paced global finance, no one person can know everything at once. You need a team working together each with different specialties pulling together to hit the main goal of making you money.
Finally processes are the specific ways that you are manager looks at building a portfolio. Do they focus on growth stocks, do they focus on emerging market stocks, do they focus on precious metals, do they focus on bonds; how your portfolio manager looks at crafting a portfolio is important overall.
So there you have several ways to evaluate an investment money manager that will help you get a clearer idea of how well they are doing and how well they have the potential to do in the future.