Meeting with your advisor soon? What to ask.

A friend asked me a perfectly reasonable question last night: I'm going to meet with my advisor soon. What should I ask about?

Here's the single most important thing to ask your advisor: If I had all of my portfolio 100% in cash right now, what would you do with it? That is the place from which we should always start when reviewing our portfolios. If we, even for one moment, consider our portfolio from the perspective of what we already own, we are engaging in the well-documented behavioral biases of commitment and loss-avoidance. Rather than view the investment landscape by considering today's conditions and tomorrow's potential -- we try to drive forward by looking backwards.

I will guarantee you that 90% of advisors are giving all-cash clients different advice than they are clients with various mixes of stocks and bonds. And this is completely and utterly irrational. Let's imagine that an advisor is telling new, all-cash clients to allocate only about 20% into stocks right now and to maybe do some dollar-cost averaging back into the market. Be cautious; take our time and see how the recession plays out. Perfectly reasonable advice, in my view.

Now, let's think about what the advisor is telling a longtime client with identical goals and life position; a client who's had 70% of her money in stocks for several years. I'll bet you a box of donuts that the advisor is telling the longtime client a different story. The advisor is talking to that client about "holding on" and waiting for a recovery. After all, the poor client's stock portfolio is down by almost half and the only way the advisor is going to recover the client's confidence is if most of that is won back, and quickly.

So that client is told to hang on. See the irrationality of it all? Under identical market conditions, what is good for one investor is 20% stocks and what is good for his twin is 70% stocks. This type of advice borders on malpractice, but it will happen in tens of thousands of year-end meetings over the next month or so.

Ask your advisor what he'd do with all cash. If that differs significantly from how you are invested, either ask the advisor to explain himself, or find a new advisor. If your advisor really thinks that you should be invested differently than a "twin you" who's starting with cash, then you have some hard decisions to make.