INVESTMENT NEWSLETTER
December 2008

Unforgiving Year

So far, 2008 has been the worst bear market year we've experienced since launching NoLoad FundX in 1976. Market turmoil has left few areas of the investment world unscathed. The average diversified U.S. mutual fund is down 41% this year and foreign funds, both established and emerging markets, lost more. Extreme risk aversion caused unusual volatility in the bond market as well and the average long-term bond fund is down 11%.

Panic selling continued until the last week in November and affected all categories: growth and value, U.S. and international, large and small-cap. Last week, however, stocks enjoyed spectacular gains and the S&P 500 finished with its second best 5-day rise ever.

Still, the S&P 500 is down 38% so far this year, on pace to suffer its worst calendar year since 1931 when the index fell 43%. But there are exceptional opportunities in the aftermath of this market meltdown. U.S. stocks are at their lowest valuations in over 20 years.

Just as there is more risk in the market when everyone is optimistic and valuations are stretched, it is less risky for long-term investors to buy stocks when fear is high and valuations are depressed. Opportunity arises when investors dump both bad and good companies in fear or panic.

Recession is Now Official

As the credit crisis escalated, the economic outlook deteriorated. Global growth is slowing sharply. The National Bureau of Economic Research reported that the peak in economic activity occurred in December 2007, thereby identifying the beginning of the recession. Since 1945, there have been 11 recessions, occurring every 5.5 years on average and lasting an average of 10 months. Every recession since W. W. II was preceded by declines in equity prices and in seven cases, these declines became bear markets (a loss of 20% or more). The average decline in equity prices before and during recessions was 26% for the S&P 500, so we are far past that. The two longest recessions each lasted 16 months. But in all cases, stocks bottomed about three months before the recession ended.

Stick to an Appropriate Asset Allocation

Some investors wonder if it's too late to lighten up, or even abandon equities temporarily to avoid further pummeling. The danger, of course, is missing out on the rebound and locking in the losses. Other investors have already sold. These individuals face the equally daunting decision of when and how to get back in. This is not intended to dissuade investors from making prudent shifts in their asset allocation to meet long-term risk/reward objectives. We simply believe it is imperative to understand the potential ramifications of any changes you make in view of your long term goals.

With money market funds and treasuries paying nearly nothing, most of us simply cannot afford to sit on the sidelines indefinitely. But it can be equally destructive for investors to take excessive risk in hopes of recapturing losses faster. An appropriate asset allocation ensures that investors take reasonable risk in order to achieve long-term goals and avoid taking excessive risks with short-term money.

We believe the best way to manage daily stock market volatility is with an allocation to the Capital Preservation Strategy. Wise investors buffer their equities with a lower-risk portfolio component, Capital Preservation. We also believe that in both fixed income and equities, it is critical to have the flexibility to follow market leadership and avoid holding lagging sectors and strategies in the name of diversification.

Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals

How long it might take to recoup losses depends on your asset allocation going forward. While the temptation to flee the market may be acute right about now, moving to a lower-returning alternative would likely lengthen the time needed to recoup your losses.