Investment Management Strategy seven Principles for Success

I knew I had joined the wrong firm a week after I had been hired. After I had examined the “book of business” I had acquired (120 clients, AUM $10 million) I saw that 90% of them had been losing money for almost two years, despite gains in the Market. Those who were not, had their money in bond and income funds.
The second sign was when the manager’s executive assistant came to me, asking for advice on her personal portfolio in her IRA Acccount. A quick review revealed that most of her money (95%)had been invested in high technology stocks. She had lost a considerable amount of money, too, but had done nothing to stem the damage. Further review showed that the Beta of her portfolio was approximately 2.7, higher than many hedge fund Beta’s! I asked her if she was aware of how much risk was her portfolio, and she responded, “So and so (the broker I had replaced who had been given a promotion) recommended these stocks.”
After explaining to her (NASD Series 7 licensed) a few investment fundamentals, such as Beta, Asset Allocation, and the importance of Diversification, she asked me to recommend how to fix it. Unfortunately, there was little I could do. The damage was done. Her investment dollars had been lost. Hence, I gave her recommendations on what to do going forward into the future.
The following day, I sat down with her and explained the nature of Beta and how important it was to calculate the overall Beta for the investment portfolio, which was not difficult since the individual Beta’s were readily available. As I told her, one can measure the amount of Risk very easily by using Beta. In addition, I decribed the importance of Asset Allocation, and the importance of not investing all of one’s portfolio in one or two stocks, or in 5 to 10 within the same industry since they were all correlated. Prudent Diversification and an acceptable Beta were extremely important to reducing systematic (market) and unsystematic (individual investment) Risk.
I’m often surprised at how often investors put their money into investments without understanding the basic tenets of Prudent Investing. Investors need to not only consider the Expected Returns but also the level of Risk associated with their Portfolios, and how easy it is to reduce the level of Risk over the short term and long term to protect their investments. A few hours of research and study can do wonders for one’s investments.
While sound investing may bring different results to different investors, investing in not all “rocket science” and an investor can take certain steps to insure that his or her portfolio will not be a complete and total loss.