Tuesday, October 10, 2006

Due Diligence: Who Would You Hire to Manage Your Funds?

Imagine the following scenario inspired by a recent Wall St. Journal article:

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 riskless 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 prior to obtaining references from satisfied clients.

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 own questions and justify why you deserve the business.

Would you hire you to manage your money? If someone else 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 do you need to take to become worthy of your own business--or, as someone trading/investing your own capital, are you in the wrong business altogether?

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