Quarterly Newsletter: July 2007

Click here to view the Index Returns for 2nd Quarter 2007
 (PDF, 237kb)

Capital Markets Update
Most asset classes delivered strong returns in the second quarter. Emerging Markets (+15%) and International Equities (+6.4%) led the way while domestic equities also performed well (Large Cap +5.9%, Small Cap +4.4%). Real Estate (-9.0%) and Bonds (-0.5%) struggled as the 10-year Treasury yield surged from 4.65% to 5.03%.

Smart Investing
A friend recently recommended an investment book to us: The Smartest Investment Book You’ll Ever Read by Daniel R. Solin–is just that–very good advice. Arbor clients won’t be surprised to hear that we like it because it mirrors our own investment philosophy.

(Similarly, we like to read Jonathan Clements’ syndicated Getting Going column in the Wall Street Journal. He’s not only a good writer—we also agree with his approach.)

Pick up a copy of Smartest Investment Book…published by the Penguin Group…$19.95. Or, save the time and money by reviewing the following key points from the book with our commentary:

• Brokers aren’t on your side – There is a natural conflict with investor goals. Brokers are generally compensated based on transactions (brokerage commissions)–not growth in your assets.
• Nobody can time the market – Market timing is nothing but a shell game. Smart investors never engage in market timing because they know it’s a sham. It is nearly impossible to successfully time the market over the long haul. Market timers also assume much higher risks. The financial cost of being wrong is potentially large.
• Nobody can consistently beat the market – Many studies of analyst recommendations find little support for their ability to pick winning stocks. Even studies that demonstrate that there can be value in analyst recommendations note that the cost of heavy trading and taxes on gains tend to offset any benefits obtained by acting on the recommendations. Morningstar confirms that 70% of active managers fail to beat the market in a given year. It is also important to note that trying to beat the market by making concentrated bets and/or trading actively is a higher risk strategy.
• Nobody can pick "hot" fund managers – An exhaustive study of the performance record of funds rated “five stars” by Morningstar failed to find reliable statistical evidence that these funds performed any better than funds rated four stars or even three stars. We know that timing the market is difficult–timing a fund manager might be even tougher. To be successful, the investor needs to first pick the right manager and then know when to switch managers (incurring substantial tax costs in doing so). Legg Mason’s Bill Miller is a great recent example. Miller is widely regarded as one of the best stock pickers in the industry and successfully beat the S&P 500 for 15 consecutive calendar years...until 2006, when his fund lagged the index by 9.9%. Miller’s 2006 returns ranked in the bottom 1% of his peers. Through six months in 2007, Miller is in the bottom 8%.
• Beware of hedge funds – Most individual investors should not invest in a hedge fund. Hedge funds are widely used by endowments and foundations for good reasons—they have tax advantages, an infinite time horizon, access to the top managers and the scale to diversify among many managers/strategies. In contrast, most individuals have finite time horizons, can’t reach the best managers, don’t have sufficient assets to diversify among strategies and shouldn’t have restrictions on accessing their funds. Also, fees are typically high.

Conclusion
The author recommends an asset allocated portfolio of (mainly) index funds. We agree!

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.

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