Second Quarterly Letter to All Clients

Published: July 1st, 2008

We hope you are enjoying the wonderful summer weather that has finally arrived.

Enclosed you will find your second quarterly reports. As many of you are experiencing, the stock market hasn’t been cooperating with our portfolios. The major indexes suffered recent losses in the past few months after experiencing a nice gain in April. On July 11th, the Dow was to 11,100 and down more than 14% for the year—well into what analysts consider “correction” territory.

There are a combination of factors affecting market performance: the slowdown in the U.S. economy, the culmination of mortgage foreclosures due to sub-prime lending practices which in turn had a major affect on the financial industry, and continued increases in energy and fuel costs to record levels are just a few of the reasons. Crude Oil Futures closed at a record high of $143.57 a barrel on Wednesday, July 2, 2008. There is obviously no one single issue at hand. Because of this, the markets have been beaten up because of the psychological reactions from investors toiling from these economic pressures.

Our belief is that this may continue for some time. But there are enough encouraging signs—relatively strong corporate earnings, reasonably healthy P/E ratios, and so on—to suggest that the fundamentals for stocks are sound, even though growth is likely to remain on the sluggish side. We can’t predict how long, but one thing is certain. The market moves in cycles and for every downturn there is an upturn around the corner.

So how should we as investors respond to this economy and market volatility? Our response has not changed much from our ordinary discussions we have had at reviews with many of you: Take a careful look at your portfolio and ask yourself if your overall
long-term strategy is sound. Do you have the right asset mix for your investment goal and time horizon? Are you properly diversified? If the answer to those questions is yes, you’re probably better off sitting tight for the time being. This is the reason we encourage all of you to meet on an annual basis for a checkup and to make sure your portfolio is positioned within your comfort zone. Essentially, if your portfolio is aligned and positioned where it should be, we advise to stay the course. We think and focus on the long term. When setting the investments in portfolios, our method and strategy is one of diversification, not market timing. Reacting to today’s headline news is reactionary and not proactive. Reacting in a down market is usually a poor decision. That leaves your portfolio vulnerable to the market losses incurred and then not being positioned for any upside to the markets.

Food for Thought: At the beginning of the year, the DOW dropped below 10% from the beginning of January to mid January. The market struggled but recovered much of those losses by the end of April. Had any of you sold your assets in January and then entered back into the market at the end of April when things felt more comfortable, those losses would have undoubtedly been much greater. There just is no timing the market. Whether the markets are doing well or struggling, your investment decisions should always be strategic, not tactical. In other words, base your decisions on “big picture” considerations and the soundness of your investment plan—not on today’s headlines. Reacting to a downturn in the stock market emotionally, with a major shift in your portfolio, is generally a very poor move.

Our clients tend to be pretty confident about the long-term direction of the market, and they demonstrate that confidence by staying calm in difficult times, continuing to invest, and putting short-term volatility in perspective. We all naturally wonder whether we’re near a bottom and sometimes try to distinguish between hot tips and losers. Periods of market turmoil and pessimism understandably make investors jittery and in such an environment, we feel the need to do something. Frequent trading in an effort to outsmart the market is likely to do more harm than good, since there’s a natural human tendency to buy and sell at just the wrong times. Market corrections often are the best times for clear-headed investors to find good long-term investments at bargain prices.

We encourage you to think about how you are invested and remember your initial investment strategy. We appreciate your feedback so if at any time you have questions or concerns, we welcome your phone calls.

Have a Happy, Healthy and Safe Summer!

Sincerely,

ARISTA WEALTH ADVISORS

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