Best Response

Good question. This gets asked A LOT in interviews. They'll look to see if you understand diversification. Are you investing all of your money in 1 stock or 1 asset class, or recommending spreading the money across multiple types of investments.

Another mistake a lot of people make, particularly those that haven't had much or any exposure to investing, is to focus on only the qualitative aspects of an investment idea. For example, they'll say they'd invest some chunk of money in Apple because it's a great brand, the iPhone and iTouch are everywhere, the app business is growing like crazy, Steve Jobs walks on water, etc., but there's no discussion on whether that's a good investment. There's a difference between a good company and a good investment. You'd want to go long and equity only if you believed the stock price would appreciate. If a great company's stock is fairly valued, you shouldn't buy it.

Don't forget to focus on valuation. You should also be prepared to discuss several major valuation methodologies (DCF, relative valuation methodologies). Here's a basic overview that's helpful if you're not feeling comfortable with valuation: Introduction to Valuation - http://bit.ly/5XSFI

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If I were asked this question, I would approach it in the same way as if the interview had asked: "what would you do with $10M?" (from perspective of student in college)

200k > college fund for lil sis 400k > college fund for my kids 2M > bonds/other fixed income... enough return after-tax to cover my annual college tuition, living expenses 2M > market fund/ETFs, value stocks
3M > growth stocks 1M > high-risk investments; cleantech, w/e 800k > cash as liquidity 600k > left over to buy stuff. I'd drop 25k on a watch that I can pass on to my kid, pay down my parents' mortgage, and spend a year living in Lhasa.

With this question, I think interviewers would by trying to get a gauge your knowledge of finance as well as the quality of your response to an unexpected or next-to-impossible situation. Some people might stick everything in one "big idea" and end up losing everything. Remember that you can invest in things other than financial instruments (i.e. education for your family, better living conditions, etc...) -- focus on whatever will yield the highest value for YOU. As a younger person, though, I think your answer should definitely reflect a greater appetite for risk.

 

"Most people ask this question to guage if you have any views on the market, so a generic answer like that prob won't fly. They might delve further and ask "Which ETFs/growth stocks/value stock would you buy and why?" "What high risk investment strategies would you pursue?"

^If the interviewer digs deeper then just give him your views. It helps to have a few specific companies or plays in mind, but as long as you can support your views and demonstrate a broad knowledge of the market I think that you can easily nail this question.

 

Would depend on my age, income requirements etc. Generally speaking I would say something as follows:

£4m bond funds spread across EM, corporate and high quality government £2m equity index funds including EM £2m high dividend blue chips £2m commodity / macro hedge funds with a track record of strong risk management and low drawdowns

Asatar:

Would depend on my age, income requirements etc. Generally speaking I would say something as follows:

£4m bond funds spread across EM, corporate and high quality government
£2m equity index funds including EM
£2m high dividend blue chips
£2m commodity / macro hedge funds with a track record of strong risk management and low drawdowns

thanks. great help. reasons for £4m bond funds spread across EM, corporate and high quality government?

 
Asatar:

Would depend on my age, income requirements etc. Generally speaking I would say something as follows:

£4m bond funds spread across EM, corporate and high quality government
£2m equity index funds including EM
£2m high dividend blue chips
£2m commodity / macro hedge funds with a track record of strong risk management and low drawdowns

That's an unnecessarily high exposure to bonds, horrible diversification.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 

I wouldn't put 4m in bonds. You have a long time horizon. 40% allocation seems high. You can probably get away with 1m in bond or 1.5m and spread investments somewhere else.

Also, you need to think about what economic trends you see long term and technological/societal trends you see long term. For example, what's your view on inflation. Nominal bonds lose serious purchasing power in high inflation environments. What's your long-term view on healthcare? People are living longer, so perhaps healthcare is a good bet. I'm not saying that you need to get this granular, but this is an opportunity to show that you have some ideas more than just a standard asset allocation from a textbook.

I'd also say that you need to understand decision risk. If you believe that something is a long-term play, can you convince your client to stick with a losing short-term asset that will pay off later? That's an important consideration when making investments for others as well as for yourself.

 
FundofFun:

I wouldn't put 4m in bonds. You have a long time horizon. 40% allocation seems high. You can probably get away with 1m in bond or 1.5m and spread investments somewhere else.

Also, you need to think about what economic trends you see long term and technological/societal trends you see long term. For example, what's your view on inflation. Nominal bonds lose serious purchasing power in high inflation environments. What's your long-term view on healthcare? People are living longer, so perhaps healthcare is a good bet. I'm not saying that you need to get this granular, but this is an opportunity to show that you have some ideas more than just a standard asset allocation from a textbook.

I'd also say that you need to understand decision risk. If you believe that something is a long-term play, can you convince your client to stick with a losing short-term asset that will pay off later? That's an important consideration when making investments for others as well as for yourself.

very valid points about bond allocation and considering long-term future trends. What long-term growth areas do you see? I have considered mobile, leisure, construction (UK), healthcare (as you suggested).

 

I'd say you should devise three 'portfolios' that would hit on the main types of investor demands from an AM; 1) Income generation; emphasis on income generating assets with preferable tax treatment 2) Capital gain; emphasis on combination of high and low risk assets diversified across liquidity ranges. 3) Wealth preservation; diversified as much as possible; holding international market portfolio + puts (for liquidity), in ratio with bonds of varying maturity, in ratio with Alternative asset classes (such as infrastructure, real-estate, gold, etc).

This is largely academic in designation though.

 

This is actually one of my interview questions (firm designs portfolios for clients) and the kind of answers u get r all over the place. What Asatar suggested isn't bad but it isn't really great either.

For this question you want to first describe your risk/return characteristics given age and other factors. You then need to come up with a reasonable allocation given the amount of risk you are taking on. For people on this forum, it would generally be along the lines of 80%-90% in equity-risk like securities such as US equity, EM equity, junk bonds, and real estate. The other 10-20% likely to be in things like treasuries, MBS, TIPS, and corporate credit.

After that, if you want you can layer in personal views such as "I believe treasuries suck donkey dk at 2% yld on the 10-yr so I'm going to have a little less of those and a bit more of Y.

So idea is personal constraints --> strategic allocation --> tactical. I usually like to throw people off a little by asking about how they would incorporate a new asset class that they didn't mention such as convertible bonds or gold. (FWIW I'm anything but a gold bug but I'm looking for thought process here).

 
floppity:

This is actually one of my interview questions (firm designs portfolios for clients) and the kind of answers u get r all over the place. What Asatar suggested isn't bad but it isn't really great either.

For this question you want to first describe your risk/return characteristics given age and other factors. You then need to come up with a reasonable allocation given the amount of risk you are taking on. For people on this forum, it would generally be along the lines of 80%-90% in equity-risk like securities such as US equity, EM equity, junk bonds, and real estate. The other 10-20% likely to be in things like treasuries, MBS, TIPS, and corporate credit.

After that, if you want you can layer in personal views such as "I believe treasuries suck donkey dk at 2% yld on the 10-yr so I'm going to have a little less of those and a bit more of Y.

So idea is personal constraints --> strategic allocation --> tactical. I usually like to throw people off a little by asking about how they would incorporate a new asset class that they didn't mention such as convertible bonds or gold. (FWIW I'm anything but a gold bug but I'm looking for thought process here).

that's a great help. thanks mate.

 
peinvestor2012:

2 million in mid caps
2 million in small caps
1 million in global macro HF
1 million in L/S HF
1 million in commodities fund
1 million in PE
2 million in HY fund

Similar to what I said to Asatar, why allocate so much into equities? Around 80% risk of the portfolio would come just from equities. You'd get burned if growth falls.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 
Edmundo Braverman:

I'd probably see how much real money I could get for it first. What the fuck is £? Is that like BitCoin?

Cyprus man. Cyprus.
Colourful TV, colourless Life.
 

The people here giving you answers will not help. It does matter what you end up choosing for your portfolio allocation but if you don't give your own reasons, it's not gonna work. I recommend you study asset allocation so you understand it well. so you can give detailed explanations of how you arrived at your portfolio.

 
jgx101:

The people here giving you answers will not help. It does matter what you end up choosing for your portfolio allocation but if you don't give your own reasons, it's not gonna work. I recommend you study asset allocation so you understand it well. so you can give detailed explanations of how you arrived at your portfolio.

true, but I only have 3 days to do this, so there's no time.

 

Take my advice with a grain of salt...

Throwing just numbers in what you're going to invest won't make you stand out IMO.. unless you have a decent line of reasoning of why you'd invest x% in this and y% in that, it won't really cut it. Not that you'll be out of the game but you won't be increasing your odds, either. And quite frankly it'll be a waste of time now to find what asset allocation would be optimal to the last bp, if not nerdy..

Maybe you could add what asset allocation strategy you'd follow once you've invested in these securities/asset classes? I.e. buy and hold vs constant mix vs other dynamic asset allocation strategies. I guess PWM must emphasise quite a bit in asset allocation strategies.

Colourful TV, colourless Life.
 
Bonus:

Take my advice with a grain of salt...

Throwing just numbers in what you're going to invest won't make you stand out IMO.. unless you have a decent line of reasoning of why you'd invest x% in this and y% in that, it won't really cut it. Not that you'll be out of the game but you won't be increasing your odds, either. And quite frankly it'll be a waste of time now to find what asset allocation would be optimal to the last bp, if not nerdy..

Maybe you could add what asset allocation strategy you'd follow once you've invested in these securities/asset classes? I.e. buy and hold vs constant mix vs other dynamic asset allocation strategies. I guess PWM must emphasise quite a bit in asset allocation strategies.

true, I will back up my investment suggestions with reasons

 

Do you know who you're investing it for and for what purpose? If not, this could be a trick question to see if you are smart enough to ask the questions necessary to make a decent recommendation. Especially if this is for PWM, which is pure sales. Obviously, you invest differently for a 94 year old widow than a 22 year old.

 

Seeing you're asking this on a public forum, I'm assuming you have no allocation in mind for the interview. If I were you, I'd be honest. If I were in your position I'd say I would allocate my resources to a passive beta portfolio, seeing the chances of you generating alpha will be close to zero (this is a reality not only for you; in relation to the whole number of investors across the world only a select few generate alpha for their clients). Following this he might be curious on any directional or L/S positions you might think could be profitable in the short to mid-term, I'd figure a few of these and explain why they could potentially generate value.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 
banker00:

set up a charitable foundation. commit the minimum 3% a year to charitable causes as legally required. reap tax benefits of being a nonprofit. purchase a bunch of technology patents and collect royalties.

pretty sure the minimum is 5% per year for a foundation, if I recall the CFA material correctly.

 

I think you should clarify the question of "who are you investing for?" Is it for yourself, for the firm, or for a typical client? Each party might also have multiple goals that they might want to achieve with the investment. That will affect your strategy greatly.

 
SirTradesaLot:

Do you know who you're investing it for and for what purpose? If not, this could be a trick question to see if you are smart enough to ask the questions necessary to make a decent recommendation. Especially if this is for PWM, which is pure sales. Obviously, you invest differently for a 94 year old widow than a 22 year old.

This is the right answer. There's no way this is going to be about your specific asset allocation. I mean, generally they are going to want to see that your not an idiot and that your choice is diversified, but its going to have a lot more to do with the questions you ask about the uses of the funds. Your not applying for a job as a PM, these people are testing the way you think

I drink your milkshake...
 
danny plainview:
SirTradesaLot:

Do you know who you're investing it for and for what purpose? If not, this could be a trick question to see if you are smart enough to ask the questions necessary to make a decent recommendation. Especially if this is for PWM, which is pure sales. Obviously, you invest differently for a 94 year old widow than a 22 year old.

This is the right answer. There's no way this is going to be about your specific asset allocation. I mean, generally they are going to want to see that your not an idiot and that your choice is diversified, but its going to have a lot more to do with the questions you ask about the uses of the funds. Your not applying for a job as a PM, these people are testing the way you think

+1 The first thing you always ask if who you're investing for, what type of risk they're looking to take on, if they have any investing preferences etc etc. In my opinion, if you don't start with that, you have already basically gotten the question wrong because a lot of wealth management is client based. From there just come up with a smart answer based on where the market is and where you think its heading.

 

1) You go on an online message board and ask people for help with an interview quesiton that you SHOULD know, hence why it will show whether you're QUALIFIED for the position.

2) You've been a defensive ass to anyone here giving you sarcastic responses, which...if you know this forum at all, is commonplace culture.

3) Beggers cannot be choosers.

4) The numbers don't matter. The justification matters. You expect ANYONE here to write up a complex thesis for you? What matters is if you can survive the 5 Why's test (I keep asking you "why" to each of your answers 5 straight times to drill whether you know your shit)

5) It's impossible to answer this question without knowing whos money this is. So either define that or tell the interviewer that you're making this baseline assumption before you give your response.

I'd throw MS at you, but considering your account is mainly for the purpose of this thread it would be a waste of my banana points.

 

This question is largely irrelevant. If the interviewer asks you this and give you no specific details about the client make up, the goals, the use of the funds. You should tell them with out information you suggest they dig a hole in their back yard and bury it. Just make sure they mark it with something so they can find it later.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

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