Choosing the Right Investment Manager for Your Needs

Would you like to know how investment managers are selected for your portfolio?  It certainly is not a case of “we like this guy,” or “who has the best return.”  There is a very clear and defined due diligence process.  But because our team of advisors recognizes that this may not be visible for you, it seemed valuable to share more about it.

Nick Lacy is the Chief Portfolio Strategist for Asset Management Services within Raymond James.   Nick took the time to articulate what goes into making investment manager selections.  Check out the video, or read more in the blog.

Investment manager selection is step 3 in our 4-Step Investment Process.  For a bit of review, step 1 is Forward Looking Capital Market Assumptions based on economic data and indicators.  Step 2 is optimizing asset allocation to maximize return potential at various risk levels.  For more on the 4 Step process, go to the RJ Freedom Investment Approach page, and click on “The 4-Step Investment Process” tab.

Now back to step 3:  manager selection.  This is where our advisors want to add top quality managers for each of the appropriate asset classes in the portfolio.  By its nature, our due diligence team takes their time, perhaps a year or more, in order to determine if a manager is a fit.  We want to understand, how has this manager generated good returns in the past, and can they repeat it in the future?  Did they hit a few lucky home runs?  Or are they consistent, with a well-designed and consistently executed investment strategy? 

In order to determine if a manager is actually consistent, Nick Lacy’s team will ask the manager for 100% of their trading history over the last 5 years, and evaluate every trade.  By going into such intense detail, the team can determine what is making the manager successful, and understand what economic environments the manager will perform well or poorly in, going forward.  Take note, even great investment managers may not look smart every year, since their process can come in and out of favor compared to the market from time to time.  Nick mentions Small-Cap Managers (which are tasked with investing in smaller, lesser known companies), who had a few very poor years, compared to other asset classes.  Yet they were doing quite well in early 2016, as Small-Cap investing came back into style, so to speak.

So, when would Nick’s team fire a manager from your portfolios?   Normally personnel changes are the catalyst.  Because we have done the due diligence, Nick’s team knows who the contributors are on the investment manager’s team.  If several of them are exiting, or the leadership is changing, that is a sign to us that things may not continue as we expect.  Recently, we made a major change away from a well-known Fixed Income investment manager for just this reason.  We don’t want the risk of an unknown team making decisions on your money.

Thank you to Nick and his team for all their time and effort to add a robust process to your investments.  If you wish to discuss Investments, feel free to call our office at 920-617-6830.

Respectfully,

Patrick Stoa
Financial Advisor.
patrick@maccofinancial.com

Any opinions are those of Nick Lacy, Mike Macco and Patrick Stoa and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss. Diversification and asset allocation do not ensure a profit or protect against a loss. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.

Rebalancing

Imagine a situation where you were at the playground on the seesaw with your older brother.  It works well at first.  Then winter comes. The next spring you hop on the seesaw again, but it doesn’t work anymore.  Your brother grew faster, and now the seesaw is out of balance.  He gets on, you fly up on your side, and you’re stuck with your legs dangling in the air, suspended until he lets you down.  Your seesaw is out of balance.  You need to rebalance to make it work the right way again.

In the video, we talk about rebalancing your investment portfolio.  Rebalancing is simply one form of investment discipline.  Rebalancing implies that something is out of balance, and needs to be returned to its original state.  It might go something like this:  We meet with a client and discuss their hopes, fears, dreams, and resources.  We agree on an appropriate mix of assets to address their situation.  We initiate investments to match that asset allocation.  Over time, some assets perform better than expected, some about as expected, and some worse than expected.  As those realities take place, the asset allocation drifts away from the agreed upon allocation.

Rebalancing is the function of bringing that portfolio back to the originally agreed upon asset mix.  This does two things for the client.  First, it brings the desired risk/return profile back to where it was intended to be.  Second, it adds a discipline to selling off some assets that have risen faster than expected and purchasing assets that have not done so well in order to restore the balance.  In simple terms, rebalancing effectively forces the portfolio to sell high priced assets and buy low priced assets. 

Of course, there is an issue of frequency.  How often should rebalancing take place?  In our opinion, it should not be daily, weekly, or monthly.  That is generally too short a time-frame for any truly significant shifts to have occurred between asset classes. 

Thanks for reading and watching.

Patrick Stoa

For questions, comments, and conversation, call us at 920-617-6830. 

The discussion contained in this video is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.  Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.  Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Investing involves risk and you may incur a profit or loss regardless of strategy selected.  Re-balancing a non-retirement account could be a taxable event that may increase your tax liability.

How long could you live without the stock market?

Would you worry if the stock market closed for five months?  It did just that at the outbreak of World War I.  I’ll admit, that is over 100 years ago.  But what if the market was only open a few days a month?  I would guess that after a time, most people would actually worry less than they do now.  To see why that is so, let’s talk about what a market is, and what it does for us.

So, we hear about the stock market all the time.  Our media outlets seem to yell to us about the Dow Jones Industrial Average and the S&P 500 indexes on a daily basis.  However, those are indexes, not a market. 

The true definition of a market is a place where buyers and sellers meet to agree on the price and delivery terms for a transaction – the best known being the New York Stock Exchange, which traces its roots to 1792.  The NYSE trades in stocks, but there are other markets for stocks, bonds, options, commodities, and many other financial instruments throughout the world. 

Let’s also think about what a market is not.  It is not a determinant of value.  A market only reveals what buyers are willing to pay, and what sellers are willing to accept at one point in time.  The actual value of the items being negotiated can be far in excess or far less than the price that is agreed upon.

So why is the definition of a market relevant?  It’s all in how we choose to think about the whole concept of a market.  The various stock markets, for example, do us an incredible convenience.  They provide the opportunity nearly every day to sell shares we own, or buy new shares.  The transaction is typically quick, easy, and really quite cheap.  Basically, stock markets offer what we call “liquidity,” which is the ability to quickly convert your asset to cash.

In exchange for the convenience of liquidity, we are subjected to the daily drumbeat of good and bad market news, along with favorable and unfavorable valuations on everything we own each and every day.  Stock prices in particular can be very close to the actual value or very far from actual value of a company at any point in time.  Over longer horizons, they will tend to follow the growth in the value of a company, but in any shorter period they can drift quite a lot.

In contrast to the stock market, real estate transactions are generally not quick, easy, definitely not cheap and, by the nature of real estate, they are local.  In other words, liquidity is low in most real estate markets.  If the real estate market was more like the stock market, someone would knock on your door each morning offering you a new price for your house.  It might be higher than you expect, or lower.  If someone offered you a price you knew was too low, would you sell because of the new price?  Would you even worry about it?  Unless something has changed in the neighborhood, you probably would not give it a second thought.  You are likely to wait for a more reasonable offer from another buyer.    

The key takeaway is to think of financial markets and investments much more like real estate.  Despite the media shouting S&P, NASDAQ, and DJIA indexes at you, the market price of your assets today is only an opportunity to sell or buy, and certainly not indicative of true value.  Remember, the financial markets only provide a price and liquidity, which is convenient.  But if you have no need for your invested money for several years, you certainly do not need to pay attention to the daily financial news. 

So back to the original question – would it worry you if the stock market was closed for an extended time?  It should only concern you if you needed the cash during that time.  Otherwise, you still own your assets, and the business you own is still operating.  Your worrying energy would be better spent elsewhere.

If you want to have a coffee and debate about how long you should go between looking at the value of your holdings, give me a call at 920-617-6830.

Patrick Stoa  

This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note that direct investment in an index is not possible.