Income Investor Perspectives

Independent municipal bond market insights for advisors

Month: December, 2014

The Benefits of Professional Management

  • When should an investor use a professional manager?
  • If an investor needs more performance (yield or return), should they use a professional manager?
  • Should a manager be selected based on performance?
  • If a manager’s performance is lagging, should they be fired (or sold) by the investor?
  • Will using a professional manager protect from market declines?

SUMMARY: Because so many investors seem to select managers by chasing recent performance, one might imagine that professional managers market themselves only by touting their performance. However, the fundamental reasons to use a professional investment manager are when the investor does not have the time or the necessary expertise to properly make those decisions themselves. Professional managers can be employed for all or a portion of a portfolio and should be selected first based on how well the manager’s strategy fits in with the investor’s goals. Neither performance nor fees should be the primary criteria for manager selection—downplaying the importance of how the strategy fits into the long-term goals could easily lead to improperly balanced risk exposure. While performance is very important, investors should favor those managers who emphasize their process, and be wary of those touting only their recent performance. 

This article discusses the benefits of using a professional manager to manage some or even all of the investment decisions—for example by using mutual funds or a separately managed account (SMA). Beyond the scope of this article is a discussion of using a professional wealth manager—such as a registered investment advisor—to conduct financial planning and to make all of the allocation and investment decisions.

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What’s the best way to time interest rates?

“Shouldn’t I just wait for rates to go higher?”

“When are yields going to be more attractive?”

“What will be the signal that rates are going to start moving?”

“What’s the best way to time interest rates?”

If these comments strike you as familiar, it is because these are some of the same questions that income-hungry investors have been asking for years—and now, with the Fed seemingly closer to finally raising the fed funds target rate, the thirst for higher more attractive yields has intensified.

Answering these questions in context, however, also requires addressing several key investing ideas, including:

  • Portfolio diversification and how much to allocate to bonds (and, therefore, also to cash and equities)
  • How much income you want or need is a function of your lifestyle—not of the market: your goals should be mapped out and described in your investment plan or policy
  • Understanding what influences interest rates and how to invest through the economic/interest rate cycles

The way that an investor deals with the first two points will be helped or hindered depending on how they deal with the third point. This article will discuss how to time interest rates, and we will discuss the other issues in future articles.

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