Special Bulletin to Our Clients – June 5, 2009

(text of email sent 6/5/09)

This is a brief mid-quarter report on the current state of the economy, the capital markets, your portfolio, and our investment activities.

Current State of Play

We appear to be in the latter stages of the global recession. The equity markets, typically a several-month leading indicator of turns in the economy, have seen robust growth since their lows in early March. Several major equity indexes are now in positive territory for the year, or close to it. The preponderance of our client portfolios are up materially for the year. This is particularly true of those of you who have steadfastly “stayed the course” with a well-diversified portfolio throughout the severe ups and downs in the markets. Exceptions are those who moved a significant portion of your portfolio (in excess of your short-term liquidity needs) to cash, or moved to a substantially more conservative asset allocation, during the year. This is because, by doing this, you rode the markets down, but failed to fully ride them back up. Those of you in this latter category should not second-guess yourselves — this is precisely the “opportunity cost” we discussed with you and you were explicitly willing to bear to achieve peace of mind during a truly troubling time.

Now What?

The question for all investors, no matter the path you have travelled to your current state, is “What do we do from here?”. Our advice to those who have been steadfast is to continue on that path. As we have been saying, a steady, well-diversified portfolio has typically provided the best means of recovery from all prior recessions and bear markets. To those of you who have substantially changed your investment strategy and allocation, we encourage you to deliberate carefully about your true tolerance for investment risk. If the turmoil of the last nine months has caused you to honestly recalibrate the risk you are capable of tolerating, then so be it. If, however, the true motivation behind your movement to a more conservative strategy was to temporarily “stop the bleeding”, then now is a good time to reassess your risk tolerance. As always, we are available to help you do so. (A useful tool in making that decision is your lifetime cash flow projection — please review your most recent one and let us know of any material changes to any of the key assumptions about your situation.) Regardless of your investment strategy, please remember that the markets will continue to be volatile and, as we have said, may indeed get worse before they get better.

Recap of Investment Activities

During the past nine months, we have, as you know, been making tactical adjustments within the context of a consistent asset allocation framework. These tactical adjustments have included, among other moves, under- and over-weighting certain industry sectors, purchasing selected individual stocks in non-strategic sectors, temporarily exiting international investments in anticipation of the dollar’s short-term strengthening, tilting fixed income investments in tax-deferred accounts away from Treasuries (other than TIPs) and toward high-grade corporate bonds, and moving a good part of your commodity exposure to a commodity investment that tends to do well whether commodities rise or fall. We have also during this time scaled back our normal rebalancing activities as virtually all asset classes were moving in concert. And we made available to you portfolio protection (for the equity portion of your portfolio) in the form of a structured note, which expires next week.

Currently, we are re-entering emerging markets as the dollar has resumed its decline, with a particular focus on China, and we expect to return to our full rebalancing activity as market conditions warrant. Also, we continue to work with the major structured note issuers to construct a wide safety net to protect your portfolio against the rare occurrence of most major asset classes all significantly declining again at the same time. While we have essentially worked out the structure of such of a note, we are still working on getting the price down — we are not interested at current pricing levels, which we consider temporarily excessive. We will keep you posted on developments in this area.

Concluding Thought

We maintain our strong conviction that a well-diversified, properly allocated portfolio is the best way to weather the uncertain times ahead. (Follow this link for a 15-minute NPR interview we did on the subject…http://www.onthemoneyradio.org/guests/uploads/154.mp3). Everything we have done and plan to do — from making tactical adjustments within your overall asset allocation, to pursuing “safety net” protection beneath your portfolio without disrupting it — is consistent with that conviction.

Please give us a call if you have any questions.