What an Investment Manager Is (and Isn’t)

How do you know if your investment manager is doing a good job? (Especially when the markets are so volatile.)

Before we answer that question, let’s remember what an investment manager is and isn’t.

A good investment manager is not…

1. An Economic Alchemist

In ancient times, alchemists were individuals who claimed the ability to turn worthless metals in gold. 

Though nobody uses that title anymore, a lot of modern “experts” essentially portray themselves as economic alchemists. They act like they can turn any financial situation—no matter how dire—into financial gold. 

When you see your nest egg shrinking, it’s tempting to believe such mythology. But the fact is, when times are bad, they’re just…bad. And bad markets adversely affect everyone. 

The only way it could be otherwise is if your investment manager were…

2. A Profit Prophet

This is the idea that a fund manager can know what the markets are going to do. Fact is, many advisors voice strong opinions about what next year, next quarter, or next week holds. But remember: that’s all those ideas are—opinions. 

Is next year going to be good or bad? Yes! It is going to be good or bad. The problem is, we don’t know which one!

It’s sad how much money is lost annually by investors who buy into the notion that some money managers have a kind of “prophetic power.” Especially when you consider that their good financial hunches and really bad guesses have a way of averaging out over time. 

3. A Money Mentalist

Many people believe that a good money manager should have an intuitive “sixth sense” about when exactly to move money from “somewhere bad” in the market to “somewhere good.” 

Moving money around in a strategic fashion is certainly an aspect of good money management. But it doesn’t involve “psychic” powers.

Consider: If investment managers actually had such ability, they’d all be retired and living on their own private islands!

Okay then…if money managers can’t spin gold out of straw or peek into the financial future, what exactly are we hiring them to do? It’s my contention that a good money manager is really just…

A Financial Farmer

If I had said, “A good investment advisor’s job is to manage probabilities,” you’d be snoozing now.

But managing probabilities is exactly what farmers do. 

Good farmers do everything within their power to grow a healthy crop. They prepare the soil, secure the best seed, etc. To a degree, they even “help nature out” by using advanced agricultural and irrigation practices. But in the end, farmers have to play the hand Mother Nature deals them.

Let’s say a smart, experienced farmer/farm manager in Oklahoma has poor results because of a severe drought. Is that his fault? 

The same year, a less competent farm manager in Iowa enjoys unparalleled success because the conditions there are perfect for growing. Does he deserve all the credit for that record harvest?

Let’s say, based on these results, the owner of the Oklahoma farm fires his manager and hires the mediocre farm manager from Iowa who just had a stellar year. And suppose the law of averages works—as it always does. 

When weather conditions change, the inexperience of the recently-hired farm manager will be seen by all. And the farm’s owner will be left with a huge helping of regret.

My advice is twofold: 1. Know what your advisor is doing to put the odds in your favor; and 2. Judge him on his success at doing that. 

Expecting your investment manager to do anything else sets you up for poor results…and a poor decision about what to do next.

My guess is that you, like most people, have other big financial questions. Make sure you’re asking all the most important ones. Email me at bmoore@argentadvisors.com and I’ll send you my free list of “30-Something Questions for People Who are 60-Something.”

Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.

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