10 Questions for Your Financial Advisor

By Dwight Cass

 

How savvy is your investment advisor? Ask these questions and find out.

 

1. What gets you stressed? With the economy threatening a double-dip recession, what scenarios are you using to stress test my portfolio? The old standards—the ’87 crash, the ’94 interest rate hike, the Asian crises, etc.— proved inadequate in 2008. Have you modified your preventive medicine? Lawmakers supporting punitive tariffs against China and other countries with large trade surpluses with the U.S. stir memories of the “beggar thy neighbor” policies of the Great Depression. What danger does this protectionist impulse pose to my portfolio? Can I hedge it?

 

2. Is the U.S. now on the wrong side of the carry trade? The recent plunge in the dollar and ongoing miniscule real interest rates could turn the U.S. into the next Japan—at least in terms of the carry trade. Borrowing cheaply in dollars and investing in higher-yielding currencies could make sense for those whose home currency isn’t the greenback. If hedge funds get involved, how will their machinations affect interest rates and the value of the dollar?

 

3. When will the bond bubble burst? With the Federal Reserve planning to open the quantitative easing floodgates again, interest rates shouldn’t rise any time soon. But QE2 and the U.S. currency’s recent plunge could spark inflation, eroding bond values. Also, if China decides to cut its massive dollar-denominated bond holdings, the bubble could deflate quickly, causing pain for investors with big fixed-income portfolios.

 

4. Should I leave financial- market analysis to ichthyologists? The massive stock market swings in 2010 are partly due to the increase in correlation among the shares of different companies; antsy investors are waiting for swings and then selling and buying en masse—much like a school of fish’s synchronized reaction to a change in direction by its leader. Does this make fundamental stock analysis irrelevant?

 

5. How do I play the mortgage servicing scandal? Analysts expect losses at the biggest mortgage originating and securitizing banks to reach $7 billion to $14 billion. Holders of billions in mortgage- backed securities and the credit derivatives linked to them are like Wile E. Coyote after he has run off the cliff but hasn’t realized he’s about to fall. Should I short the banks?

 

6. When was the last time you put my insurance out to bid? It’s been some time since the broker/insurer sweetheart deal scandals of the mid- 2000s. But with the insurance landscape changing rapidly—not least because of AIG’s spiral—am I getting the most for my premiums?

 

7. Is Greenlight another red light for real estate? The hedge fund’s boss, David Einhorn, the man who put the screws to Lehman Brothers before its demise, has laid out a new case, this time against St. Joe Company. Einhorn says the Florida developer’s property portfolio is worth far less than the company claims. St. Joe shares sold off sharply after Einhorn presented his case at a conference in October. Are other developers, such as Toll Brothers or D.R. Horton, also in for more pain?

 

8. How can I ensure my gold exposure glisters? Shares of gold mining companies typically lag the price of the commodity, due to a combination of administrative costs, forward sales entered into for hedging purposes, and sometimes-misguided corporate diversifications. But they tend to be less volatile than gold itself. Is it better to invest in gold miners or in the commodity?

 

9. Where’s the cash? Corporate America’s massive cash caches have prompted a rush into technology stocks, where most of this lucre is stashed, in the hope that the companies will issue special dividends or ramp up stock buybacks. Is investing in tech firms with large cash war chests a better way to pursue yield than simply buying high-dividend stocks?

 

10. Are emerging markets ready for prime time? Financial advisors and asset managers are recommending emerging market investments as a “core” portfolio allocation, like fixed income or large-cap stocks. But many emerging markets investments have large bid-ask spreads, little transparency, high fees and significant illiquidity. How do I know the ones you’re recommending are best?

Curator