INVESTMENT NEWSLETTER
March 2009

Stumultuous

January ended with more historic declines - both the DJIA and the S&P 500 had record drops, 8.6% and 8.3%, respectively. The small-cap Russell 2000 sank 11.2%. But while its peers suffered their worst January ever, the tech dominated Nasdaq gave up just 6.4%, an improvement over last January's 9.9% loss

Sellers appear to be more discriminating. In extreme bear markets like last year, investors sell everything. Now, people appear to be selling things they don't want, and accumulating things they like. Utilities, health care, and technology are losing the least. Financials and real estate funds were the hardest hit. Mid and large-cap growth held up better than value funds, particularly small value, down 11% last month. Gold hit a five-month high.

Overseas declines were steep. The EAFE index lost 11% last month and the average international fund lost 10%. Both the Euro and British Pound lost ground to the dollar on concerns related to bank losses. Barclays Bank shares lost 42%. European funds were worst, down 10.7% on average while emerging markets, particularly Latin America were best, losing only 2%.
Economic conditions continue to deteriorate. People are losing jobs and sentiment is down because many people are both pessimistic and poorer.

We Are Not Alone
After stock and bond investors suffered severe losses in most all asset classes and market sectors last year, it's important to remember one of the basic principles of investing- that risk and potential reward go hand in hand. Over the long term, responsible risk taking has been rewarded, despite shorter term periods of losses. In fact, looking back at every possible 20 year holding period dating back to 1925 (including the Great Depression), stocks never failed to outpace cash.

The primary concern for many investors is making their money last. And, realistically, there are limited investment choices. Stocks have historically generated far higher returns than those less volatile alternatives over extended periods.


Hordes of Cash
As stock prices declined investors fled equity markets and flocked to cash. Money market funds grew by more than $500 billion in 2008. As a percentage of the capitalization of the U.S. stock market, money market funds are now over 40%. This is significantly higher than the previous peak of 27% reached in early 2003 after the 2000-2002 bear market.

While the market (as measured by the S&P 500) gained 29% in 2003, money began moving out of cash and dropped as a percentage of stock market capitalization, reaching under 15% by early 2005 and staying there through most of 2007.

With the Fed funds rate near 0%, and the Federal Reserve using all of the tools at their disposal, borrowing rates will likely stay at levels unsatisfactory to investors for a while. It will be increasingly difficult for investors with over $3 trillion in money market funds and savings accounts to justify investing for a negative real return. And that cash will eventually be fast burning fuel to move the stock market higher.

Rebalance to Meet Long-Term Goals
The reason investors need to follow a disciplined long-term investment strategy is to allow them to navigate the market's ups and downs in a manner that should lead to achievement of long-term goals.

Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals