Evaluating your money manager

Let's imagine that 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 risk-less 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.

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 questions and justify why you deserve your own business.

Would you hire you to manage your money? If someone 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 would you need to take to become worthy of your own business? Would you need to more clearly document an objective edge in the market? Would you need to more consistently exploit a demonstrable edge? Would you need better diversification and risk management?

Or, as someone already trading/investing your own capital, are you in the wrong business altogether?

If you had a money manager investing a portion of your money and achieving your results, would you hire that person to manage the remainder of your capital or would you fire them?

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Performance, is due for publication this fall (Wiley).