Ditching a dreadful money manager

(Money Magazine) -- Question: After three years of negative returns, I need to find a new money manager. What should I ask and is there anything I can rely on that ranks the quality and returns for money managers?

The Mole's Answer: I hate to give you bad news, but as you probably suspect, three years of negative returns is awful. As of Sept. 30, 2007, the 3-year return of the Total U.S. Stock Index was 47 percent and the Total International Stock Index was up 98 percent.

Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.

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To achieve a negative return during this raging bull market is truly phenomenal, not to mention somewhat depressing. Your portfolio should be up on the order of 50 percent - not negative as you've experienced.

My guess is that when you hired this money manager, he sat down and showed you some colorful charts that showed how well certain investments performed. He then went on to explain the logic of why they performed so well. You may have thought something along the lines of "wow, this guy is brilliant!"

Most likely, what really happened was that your planner used a computer tool to pull up the strongest performing investment products over the past few years and then used hindsight to explain why they performed so well. This is an old trick commonly used by planners and money managers.

It's easy to find investments that performed well in the past. Unfortunately, buying them after they have gone up and then selling after their performance disappoints, puts you in the land of buy high/sell low. Don't do it.

If you want to find a new money manager, my advice is to find one that emphasizes these three principles:

You may be feeling now that you want to find someone to play catch up for that money you lost with your current manager, but if you're planning on doing that by chasing hot performers, you're likely to get hit with more disappointment.

Find a manger who talks about diversification and asset allocation.

Buying high cost investments, or paying high fees to your advisor, will likely also result in lower performance. See, the more you pay in fees, the lower you should expect the overall return to be. It turns out that all the bells and whistles research you're paying for merely transfers your wealth to someone else.

Ask your money manager what your total costs will be. Try to keep those total costs well below 0.75%.

Stay away from any manager that tells you he has even a clue as to what the market will do in the short-run. If he's moving you in and out of investments, odds are he's timing things wrong which will increase risk and taxes, as it lowers return.

Find an advisor who thinks long-term and stresses your need to stay the course, once you pick the asset allocation target. Also look for the money manager who recommends that you should re-balance periodically, which essentially means buying low and selling high.

While it's important to research the new manager and get references, I've not met a money manager yet who couldn't get three people to say something great.

When it comes to investing, it often transpires that we're our own worst enemy. After missing out on the returns of a raging bull market, you may have the feeling that you want to catch up by finding the next hot manager. Acting on this feeling will consign you to repeating the cycle over and over again.

If you pick a new money manager who shows you great historic returns with low risk, you have again selected a manager who is buying high. Get off the treadmill of paying high fees and chasing performance.

Think of the market as a river: if you embrace it, you can go with the flow. Trying to beat it will only have you swimming upstream and getting nowhere.