Quarterly Newsletter: April 2008

Click here to view the Index Returns for 1st Quarter 2008
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Capital Market Update
All equity asset classes experienced losses in the first quarter, while fixed income asset classes, bolstered by lower rates and a continued flight to quality, posted solid gains. After bottoming out on March 10th, US stocks, as measured by the S&P 500 Index, rallied 4% over the final three weeks of trading, but ultimately finished the quarter in negative territory (-9.4%).

Inflation Linked Bonds led all asset classes for a second straight quarter with a 4.9% return followed by Short Term Bonds (+3.0%) and Intermediate Term Bonds (+2.2%). The Senior Secured Bank Loan market, or Floating Rate Securities, posted a disappointing (-5.7%) loss for the quarter as it continued to struggle with excess supply, weak demand, falling interest rates and the specter of rising defaults.

Risk and Return
Dealing with the Trade-Off
The Holy Grail for investors is to increase return–while also reducing risk. There is a clear and direct relationship between the two; virtually all assets over most time periods demonstrate this persistent connection: increased return goes hand-in-hand with increased risk. In fact, the very reason we are able to generate investment returns is precisely because we're willing to accept volatility along the way. Market forces ensure that we're rewarded for the rocky ride through positive investment returns over time.

Fortunately, there are ways to decouple these two forces–at least a bit. Modern Portfolio Theory demonstrates that by adequate diversification among asset classes which are not directly correlated, investors can lower volatility without sacrificing a significant amount of return.

Arbor client investment results demonstrate this. The chart on this page shows all Arbor Investment Advisor client accounts with five years of data. Annualized risk, as measured by standard deviation, and return numbers are shown for the five-year period ending December 31, 2007. The Capital Market Line connects the two dots between an essentially riskless investment (Citigroup 3-mo. T-Bill Index) and an all Large Cap US Equity portfolio (S&P 500 Index).

The distribution of dots on this chart illustrates several points:

• Asset Allocation is key. Note the difference in returns among accounts. The primary reason for this dispersion is the mix of assets in the portfolio. Those toward the upper right are more aggressive, more equity-oriented; those in the lower left lean more toward fixed income.
• Diversification helps reduce risk. Arbor client portfolios are highly diversified. Virtually all utilize a variety of asset classes, including large cap, small cap, growth, value, international, emerging markets, real estate and different types of fixed income securities. Notice that most accounts are above the two asset Capital Market Line, denoting that this diversification enhanced returns and reduced risk.
• Other Factors are at work. Noise in any portfolio impacts the numbers. There are a few accounts below the Capital Market line. By investigating these specific portfolios, we find that this underperformance is explained by the holding of underperforming individual stocks which impacted returns negatively.

But the overall results are excellent and affirm our basic philosophy:

We build custom asset-allocated portfolios to meet each client's unique goals; we implement the portfolios with low-cost, tax-efficient investment vehicles; and we maintain investment discipline by rebalancing to stay on target.

Thanks Frank!
March 31st marked a milestone for Arbor. Frank Lord-a Principal of the company for the past ten years-turned over his client duties to other Arbor Advisors and retired as an active investment advisor. We have counted on Frank's wise counsel-to clients-and to us. We wish him well as he and Kay enjoy more leisure time and travel. Frank will continue to manage our financial records and will be available for special projects. Thanks for everything Frank!

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Arbor Investment Advisors, LLC. Please remember to contact Arbor Investment Advisors, LLC if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please also advise us if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement discussing our advisory services and fees remains available for your review upon request.

Previous Newsletters:
Quarterly Newsletter: December 2007
Quarterly Newsletter: October 2007
Quarterly Newsletter: July 2007
Quarterly Newsletter: March 2007
Quarterly Newsletter: December 2006
Quarterly Newsletter: October 2006
Quarterly Newsletter: June 2006
Quarterly Newsletter: March 2006