Image by: Doug8888
By Michael Sterling
In this day and age, investors are so eager to get their hands on their own money that they fail to think rationally about where it’s going. Contrary to popular belief, not all portfolio managers will make you rich. Some can be detrimental to your entire savings. Choose wisely by consider these three points.
#1) They Lack Information
Many investors complain about losing their money through their managers, yet they manage to look passed it. After all, their investment moves “seem” to be based on informed decisions. Well according to Goldman Sachs’ Portfolio Strategy Research team, that might not be true.
“While investors focus on European sovereign debt and bank problems and Fed policy,” one bullet read, “our client discussions reveal that portfolio managers are not aware of the wave of negative pre announcements across the market.”
According to the research, the reduction between the midpoint of new guidance and consensus estimates prior to the pre-announcement ranged from 2% – 20%. In fact, the median second Quarter reduction equaled 4%, and firms lowering quarterly earnings guidance included major companies like Proctor & Gamble, Starbucks, Ryder Systems and Adobe Systems.
Many of the above companies are major economic bellwethers, and most of them reveal intimate details about the economy. Even if these stocks aren’t in the portfolios of particular fund managers, it’s always a gamble to bet on their attention span so why not do it yourself?
The NY Stock Exchange, NASDAQ, and CNNMoney have open forums and reports. All of which the portfolio manager reads. Take it into your own hands and match up the their decisions with facts.
#2) Indexes Outperform Managers
2013 brought one of the best 12-month jaunt for the large cap benchmark index since 1997. Though these types of profits will but a smile on most investors’ faces, many of them won’t see them since, according to studies, 75% of professional money mangers lag their benchmarks overtime because they actively try to beat them.
The indexing trend has been growing and gaining converts since 1975, including Warren Buffett. The risk of losing to an index goes up almost as fast as the market does, so one of the things you can do is build portfolios that use indexes but then implement an asset allocation strategy once its set.
This type of method will always help you in a declining marketing environment. Most investors tend to buy a fund after it turns up on their radar for being hot or having a word of mouth popularity, then selling it when falls. If your portfolio manager is consistently underperforming, never should you tolerate it. Buy an index. That’s always a better solution.
#3) Consider The Firm First
Your main focus should always be to sustain economic value without getting taken as a fool. When underperformance continues to fall in your lap, one solution is not to fire but replace the manager with another in the same firm. For many it seems to be a good human resource strategy.
The firm’s reputation is at stake as well, never forget that. Something like a reputation will always help you in the grande scheme of things since it all contributes to growing the value of the firm.
If the firm is large enough and the portfolios small enough, the impact on the reputation will be a bit larger. But for bigger firms, some portfolio manger turnovers will be forgiven. Use your best judgment and never forget to pay attention to Portfolio News on numerous outlets like CNNMoney. Resources like this will let you know what the water cooler news is for your firm.