Prescription before the diagnosis?

I get asked a lot of the same questions every week—questions like, “Is now a good time to buy bonds?” or “Should I buy an annuity?” My answer is always the same, too, and it takes the form of a question: “What are you trying to accomplish?”

Now, the response I typically get back is some variation of, “To make money, of course.” But my question is very serious. There’s a common fallacy among clients that financial “insiders” know the secret strategy for making money. The truth of the matter is that there are plenty of strategies, new and old, which work for some investors and not for others. For one client, I may recommend mostly bonds, but for another, I will stress stocks instead. Even if I do recommend the same asset allocation to two clients, the underlying securities may be completely different. How can that be? Isn’t there one right answer?

What Should the Doctor Order?

Consider this analogy: Imagine a terrific new cholesterol medication comes onto the market. You have to take it every day for three years, and then your high cholesterol is permanently “cured.” The drug is very effective. Sounds great, doesn’t it? Yes it does—but the drug also has side effects. For instance, you cannot drive while you are taking it. Should your doctor prescribe it for you? Maybe yes, if you’re a desk jockey who lives in the city—but probably not, if you make your living as a truck driver.

There is also the question of whether you are the type of person who can stick to a once-a-day regimen for three years; with a lot of medications, it’s worse to go on and off than never to start at all. The point is, your doctor needs to weigh all the pros, cons and tradeoffs before prescribing this new medication for you. And to do that, she or he needs to ask you a lot of questions first, and get to know your specific lifestyle, risk factors and other concerns.

The same is true for wealth managers. No advisor should ever make a recommendation before thoroughly examining your habits, experiences, personal considerations and unique preferences. A decision is only as good as the information it is based on.

That is why, like a good physician, a good advisor should always be asking you questions. What are your goals? What do you fear? What kind of person are you? Can you stay the course as an investor no matter what the market is doing—which history shows is critical for success? You wouldn’t feel comfortable going to a doctor who prescribed a pill before making a diagnosis. In the same way, never listen to an advisor who proposes a solution before fully understanding the problem.