What do we mean by investment management?
When we develop a financial plan for a client, we want to understand their overall financial position. We note their major assets – bank accounts, real estate, business interests, Social Security, retirement savings and the like.
Having this overview helps us assess the growth and income they can expect. We can then gauge how achievable their goals are.
The portion of our clients’ assets that we manage will be in stocks and fixed-income securities. We counsel our clients to invest with a time horizon of several years. Money for near-term expenses should be kept in the bank.
What Do We Do as an Investment Manager?
Clients trust us to select and manage investments on their behalf. At our firm, this means stocks and fixed-income securities that meet our strict criteria. Our key principle is that clients should be compensated for taking risk.
Whether stocks or fixed-income, we invest in securities of issuers that have been around for years. We don’t buy start-up companies, private partnerships, or anything that ties up our clients’ money.
Stocks represent ownership interests in real businesses. We evaluate their profitability, growth potential, competitive position, quality of management, and how the stock market price compares to our estimate of fair value.
We don’t look for the next “hot” stock or try to beat a particular market index.
We want to own good, well-managed companies that are reasonably priced. These give us the best probability of helping clients stick with their financial plans to achieve their goals.
We leave speculation to others.
You can read in detail about our criteria for stock investing in our post “How to Find Good, New Stocks: Our Three-Part Test.”
Fixed-income securities represent borrowing by government entities and corporations. Issuers pay investors interest.
We evaluate whether such interest payments are high enough to compensate for credit risk and the likely loss of purchasing power from inflation.
We often use low-cost exchange-traded funds to invest in fixed-income securities. These can provide wide diversification in areas of the market that we find attractive.
Asset Allocation & Monitoring Holdings
Other aspects of our investment management include deciding how much of an investment to buy in a client’s account, monitoring the financial condition of each issuer over time, and deciding when it’s time to sell.
We analyze earnings reports, company announcements, industry developments and the impact of economic changes. All of these can affect our estimates of a company’s value.
Why Is Investment Management Important?
Investors who are skilled at analyzing businesses can do well on their own, provided they also have the time and temperament to do so.
Even these investors may decide to hire an investment manager. Selecting and monitoring investments is a time-consuming job, and they may decide they would rather spend time on other pursuits.
Some people find out the hard way that investing is a demanding task.
During a bull market, it looks easy to make money from buying stocks. New companies are brought to the market and sometimes skyrocket in price. The financial media will encourage the excitement and highlight the fortunes being made by speculators.
But then, inevitably, things change. Stocks that were once flying high come back to earth. People who paid high prices for the speculative favorites will wonder what to do now. What is this stock actually worth? Should I buy more? Sell?
Buying high and selling low is not a winning strategy. An investment manager who understands value can keep their clients from making mistakes that will cost them dearly.
Next: Retirement Planning