INVESTMENT NEWSLETTER
December 2008

Wild Ride
Dreadful October Capped with Great Final Week

By any measure October was one of the worst months ever for markets worldwide. Selling was indiscriminate and not only for stocks, but commodities, currency and bonds as well. Panic that the world was heading into recession carved trillions in value from global markets, the most ever recorded. But the final week was the best week for the U.S. market in 34 years, reminiscent of the sharp recoveries from previous bear market lows.

First a re-cap of the pain: all measures of volatility hit all time highs. For the month, the S&P 500 was down 17%, and every sector and nearly every stock sank. Unlike previous bear markets, the current rout that started a year ago left all but 2% of the S&P 500 lower. In contrast, during the last bear market that started in 2000, the S&P 500 lost 49% but a surprising 54% of the 500 stocks managed to move higher.

The average diversified U.S. stock fund lost 19% in October and there were few places to hide. Diversification and moderation didn't help much as all groups declined. Value and growth funds tumbled side by side, ending with value funds as a group modestly ahead. Large-cap funds held up slightly better than small-cap. Among sector funds, healthcare, biotech, and utilities held up best.

Domestic markets were among the calmer markets during the month. Japan's Nikkei hit a 26-year low. Tiny Iceland's exchange tumbled 81% for the month. Emerging markets were hard hit - roughly $900 billion was lost from the 25 major emerging markets- and single country funds showed some whopping losses. Latin American funds lost an average of 33%. Argentina and Brazil saw their biggest one-month losses since 1998, down 40% and 26%, respectively. Russia won the volatility prize, closing October down 29% even after a 43% gain in the final week.

The U.S. dollar gained 14% against the Euro in October, fueling nosedives in energy and other commodities. The dollar gained even more against other currencies: 22% against the Canadian dollar and 32% against the Australian dollar. Oil prices tumbled 33% during October, marking the largest monthly drop since futures trading began in 1983. Gold funds lost 37% on average.

Is The Worst Over?
With regard to ferociousness, the current bear market is worse than both the average and median of the past 12 bear markets since 1926, but not unprecedented. Sell-offs of similar or worse magnitude occurred on four separate occasions, including the Great Depression. Excluding the Depression, the magnitude and duration of the other three occurrences suggest that we may indeed have reached a bottom. Each of these markets generated solid investment returns over the following 1, 3, 5 and 10 years, once the bottom was reached.

Some of the Best Opportunities Occur Immediately Following a Bear Market
History shows that often investors make the mistake of bailing out near market bottoms. Recently, some investors have abandoned their long-term investment strategy by moving a portion, if not all, of their portfolio to cash. But it's important to remember that market recoveries often occur in bursts, particularly during the months following a bottom. For instance, the average market return for the six months following a market bottom has been 31%. The average cumulative returns produced after the prior bear markets have bottomed amounted to 296%. Annualized, these returns equate to 22.6%, 17.2% and 13.8% on a 3-, 5- and 10-year basis, respectively.

How Long will it take to Recover?
The mathematics of loss are such that if one loses 30%, it takes 3.7 years of cumulative 10% gains to recover. At a 5% annual compounded growth rate, it takes over seven years to recover a 30% loss. The same 30% loss can be recovered in two years with a 20% annual gain.

The actual average and median amount of time it took to recover losses after prior bear markets since 1929 has been 2.91 and 1.63 years, respectively. These short time periods are entirely due to the sizable gains during past market recoveries, particularly during the six months to a year following a bottom.

Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals

Regardless of one's asset allocation, it's painful to see the kind of losses nearly all investors faced this past year. Still, it's critical to focus on the future. You cannot change the past, but you can learn from your experiences.

Below are some of the things we have learned over the past 39 years of Upgrading:

Discipline trumps luck over the long-term.

Without appropriate asset allocation, "would-be" long-term investors often become their own worst enemy- selling after declines, and buying back after major advances.

Market leadership changes over time, and Upgrading is an effective way to take advantage of these changes - no predictions required.

It generally pays to be optimistic. The current rally may be a new bull market, or it may simply be a sharp correction following a brutal decline. Over the long-term, however, the market tends to recover well before the economy or most investors predictions.

Businesses have intrinsic value and some funds will gain, even if the broad market continues to decline. Upgrading
will help us participate in the next bull market, wherever it occurs.

It's never too late to be proactive and adjust your asset allocation to meet your current and future needs. The key is to act rationally and not emotionally. Make changes incrementally and recognize that consistent actions over long periods of time are rewarded.

We don't know what the market will do near-term, but we do know what trades are implied by Upgrading based on our current rankings. We also know that following these rankings consistently over the past 39 years has led to impressive returns and has helped thousands of investors fund their long-term goals