Forget FAQ’s, what about SAQ’s

By Jeff A. Christie, October 22, 2009

I was at an event recently when another attendee and I started a conversation, and he made a comment that I found to be very insightful.  He had heard of my firm, seen me on tv and listened to me on the radio, and he mentioned that one of the most important pieces of information people need to know is what type of questions they should ask about their investments and financial plan.  He mentioned that people understand the frequently asked questions (FAQ’s) but needed to know the should ask questions (SAQ’s).  So in response to his very wise comment, this week’s blog is about the questions you should be asking your investment advisor.

Question #1: Do you consider risk-adjusted returns as part of your investment strategy?

Risk-adjusted return measures the amount of return you received on an investment relative to the amount of risk you took.  One of the most common ways to monitor your risk-adjusted return is by calculating your portfolio’s Sharpe ratio.  Click here <http://www.investopedia.com/terms/s/sharperatio.asp> to learn how to calculate.  As a general rule of thumb, the higher the Sharpe ratio, the better.

Question #2: Do you measure your returns against an appropriate benchmark?

When it comes to your investments, you must constantly be measuring their performance.  But, do you compare that performance to the right benchmark?  There are many different benchmarks you can use, for instance, when it comes to large cap domestic stocks, most people use the Standard & Poor’s 500* (S&P 500).  But that does not mean it is a good measure for your portfolio.  If you have a high concentration of international stocks, or high yield bonds, or real estate in your portfolio, the S&P 500 would not be an appropriate benchmark.  Ask your advisor what benchmark they use to measure your returns, and be sure it is a good fit for your portfolio.

Question #3: Am I positioned to take advantage of the economic cycle?

The economic cycle is the continuous and variable degrees of economic activity the economy experiences over time.  There are four stages, they are expansion (growth), peak, contraction (recession), and trough.  Does your investment strategy take the current stage of the economic cycle into account?  There are specific sectors of the economy that perform better during the different cycles.  For instance, during a recession, the consumer staples sector tends to outperform consumer discretionary sector.  Does your portfolio have the flexibility to take advantage of this, or is it simply buy and hope?

There are  of course many other questions to ask your investment advisor, but I thought these three would be a good place to start.  I hope these ideas and questions help, and as always, should you have a question, please feel free to email me at jchristie@kenstern.com.

Questions are good, especially when it comes to your investments, so ask them.

Jeff A. Christie
Wealth Manager

Ken Stern & Associates

CRD# 4889641
CA Insurance Lic.# 0F01343

*The S&P 500 in an unmanaged index, investors cannot invest directly in an index.