INVESTMENT MANAGEMENT
How I Invest and Manage Money
Investment Manager Performance Evaluation
Mutual Fund manager performance is evaluated on a weekly basis. In a discretionary and active investment system, I am not content with holding onto a manager during a long period of bad. Mutual funds do not go up forever. Funds will go through a period of underperformance. Therefore, there can be fund changes in the account at any given time.
Measuring the time-weighted return is not enough; the risk of each investment portfolio should also be considered. A portfolio that slightly underperforms the S&P 500 but carries only half the overall risk is superior on a risk adjusted basis to a portfolio manager that slightly outperforms the S&P 500 but carries a full amount of market risk.
As a client, it will be important for you to be comfortable with change. This philosophy is in total disagreement with the theory of buy and hold investments. I consider the following when evaluating a mutual fund manager:
- Performance Ranking against Fund's peer group
- The 200, 90, and 30 day moving average of the fund
- Performance against specific indexes (based upon the investment style of the manager)
- Performance against the overall market
- Volatility based against the risk characteristics of the fund
- A change in stock or bond holdings in a portfolio
- Technical aspects of the fund's performance trend
- Managers Tenure
- Age of Fund
- The investment style and discipline of the proposed manager
- The current economic environment
- The likelihood of future investment success, relative to other opportunities
I have selected certain criteria on which to base a sell decision. Keep in mind that replacing a fund manager is not an exact science. Deciding when to replace a portfolio manager is often as much subjective as it is objective.
There is no set determined time that a fund will stay in a portfolio. A fund can be sold at a gain or a loss. The outcome is not as important as the effective positioning of investments and the long-term result. Once again, it is important for clients to be comfortable with change.
When a change occurs, a full explanation will be sent to you via e-mail or mail. (your preference)
Sell Strategy
In the previous section on Mutual fund manager evaluation, we discussed criteria for buying and selling mutual funds. There is also a criterion for the time when market risk is excessive and assets need to be placed elsewhere. These times are important to identify due to the nature of the marketplace.
Buy and Hold has been the accepted method for stock market investments. A person will buy a security and hold that security for the long-term. This is based on the notion that the long-term approach always works for investors. History would say otherwise.
Let's look at research compiled by Michael Alexander in his book Stock Cycles.
Long Term Bear Market |
Long Term Bull Market |
||||
Period |
# of Years |
Annual Real Return |
Period |
# of Years |
Annual Real Return |
1802-1815 |
13 |
+2.8% |
1815-1835 |
20 |
+9.6% |
1835-1843 |
8 |
-1.1% |
1843-1853 |
10 |
+12.5% |
1853-1861 |
8 |
-2.8% |
1861-1881 |
20 |
+11.5% |
1881-1896 |
15 |
+3.7% |
1896-1906 |
10 |
+11.5% |
1906-1921 |
15 |
-1.9% |
1921-1929 |
8 |
+24.8 |
1929-1949 |
20 |
+1.2% |
1949-1966 |
17 |
+14.1% |
1966-1982 |
16 |
-1.5% |
1982-2000 |
18 |
+14.8% |
Overall |
95 |
+.03% |
Overall |
103 |
+13.2% |
As you can see, almost 1/2 of the time since 1802, market returns have barely broken even with regard to average. If you look at actual dollar loss, the numbers are not too comforting. Markets can be broken down into two types of trends: Long-Term and Short-Term.
The history of the market consists of a series of positive and negative trends. There are basically two types of trends in the markets. First, there are long-term trends. A long-term trend takes place over a long period. (10 to 20 years) Second, there are short-term trends. A short-term trend is a shorter trend of 2 to 5 years. A long-term trend consists of a series of short-term trends.
Let me add one other term to these trends. We can have either Long-Term bull trends or Long-Term bear trends. We can also have either Short-Term bull trends or Short-Term bear trends. Once again, a long-term bull or bear trend consists of a series of short-term bear and bull trends.
It is important to note the risk is greater with a long-term bear market. Currently, there is a great deal of evidence that would suggest we are in a long-term bear market. Long-term bear markets are a bad situation for buy and hold investors. For investment management systems that manage for excessive market risk, there is hope. We cannot get around the possibilities of long-term bear markets. However, we can watch the market and understand when excessive risk is present. At those times, it makes sense to move assets to bearish type investments, bonds, cash, and fixed type assets.
Fees and Expenses
Management Fees
Prudent Money Financial Services charges fees for the management of investments. These fees are based upon the investments under management and calculated quarterly. The charge fees according to the following schedule:
Assets Under Management |
Annual Fee Not to Exceed |
$0 to $500,0I00 |
1.50% |
$500,001 to $1,000,000 |
1.00% |
$1,000,001 to $2,000,000 |
0.85% |
$2,000,000 and above |
Negotiable |
The management fee program allows for the elimination of any conflict of interest that investors encounter with commissioned salespeople.
The number of trades in your account does not affect my compensation. There are no additional transaction charges in our accounts or annual fees. Additionally, I do not receive any additional compensation through mutual fund companies for holding their funds. (12b-1 fees) With my compensation tied to the rise and fall of your account value, my motivation is in-line with your objectives. First, monitor risk. Second, grow the investments. It comes down to the balance of risk and reward. I have to produce a win/win experience. If not, there is nothing that prevents my clients from leaving.
Hourly Consulting
Many times people just need advice. I have developed a program where I can help people strictly on a hourly fee basis. This is for someone who just needs advice or direction on financial and money issues. I can help in the following areas:
- Retirement Goal Planning – (I implement my benchmarking system as a way to help you stay on track!)
- College Planning – (I can help you determine the best type of account and help figure out your college planning goals)
- Estate Planning – (I can handle the life insurance planning aspect and make sure that you are in the right type of plan for your family. I can also refer you to an attorney for any legal help.)
- Debt Planning – (I don’t offer debt consolidation. However, I can help you determine your options and develop a game plan)
- Boundary planning (I will teach you my boundary planning system. It is a substitution for budgeting. I don’t believe in budgeting!)
- Small Business Consulting – (Through the years I have consulted with business owners on a variety of different issues.
- 401 K risk assessment - (I can conduct a risk assessment and recommend the best strategy for your company retirement money.)