Real Test for a Money Manager

It’s easy to manage money when you are given a set of instructions and objectives by clients and a group of support personnel looking at your portfolio changes and compositions. The AUM is already there. It’s almost cheating and I have been taught not to cheat by my role models. I think the real test for a portfolio manager should be to manage $25,000 of your own money using an execution only broker.

To be a good money manager, you need 1. Understand and set goals, 2. Understand your resources, 3. Think about methods of achieving those goals, 4. Establish monitoring procedures, 5. Evaluate yourself. Think what each process involves. These are not easy to achieve.

This project shouldn’t be about you investing $25,000 just to see if you can do it. The mentality should be this $25,000 is all you have and you need to generate income for you to live on and you also need to let the original investment grow so that you can eventually have a better life.

I doubt how many portfolio managers can do it. There are many drivers that you can control and drivers you can’t control. With resources this limited, there are more drivers you cant control. Unlike your “institutional investor colleagues,” you do not have any bargaining chip over the commissions. If your execution-only broker says a price, that’s the price. You don’t necessarily get the ideal bid-offer. When you buy, you pay more than your institutional colleagues. When you sell, you get less than your institutional colleagues.

I didn’t arbitrarily bring up $25,000. $15,000 – 25,000 limits your resources considerably, but not excessively. $50,000 gives you too many options. $10,000 gives you too little. Important thing is that your profession is money management. This suggests that you can make living by managing money.

Let us define the problem further.

1. Let’s assume that we don’t have to pay the rent. We merely need to cover our living expenses. Let’s say this is $25,000 p.a. Let us be generous; we don’t have any income need in the first year, but exactly in a year time, we need to be able to liquidate $2,500 a month from the portfolio and the money must last indefinitely.
2. You will be paying for the commission costs and are responsible for the calculation.
3. You do not have any contacts. You can use any execution-only brokers and as many brokers as you want.
4. Your ultimate goal is to make living and increase the original investment (to give more flexibility to your approach).
5. In the first year, let us assume that until the liquidation (so until the 13th month), there is no tax payable.

In academic and non-academic setting, people have been arguing managers’ skills without giving consideration to resources of managers. I believe good managers can excel under all conditions. After all, we are getting paid for our thought, not for the brand and capabilities of the organization that we belong to.