Quarterly Newsletter: July 2008

Click here to view the Index Returns for 2nd Quarter 2008
 (PDF, 193kb)

Capital Markets Down Across the Board
The quarter ended with losses in virtually all asset classes. The Dow Jones Industrial Average was down 6.8% for the quarter and finished 20% lower than its previous high point in October of last year—which qualifies this market officially as a bear. Typically, bear markets are precipitated by unique economic factors or market excesses. Our last negative market (2000-2002) followed the technology stock bubble. This latest drop has been triggered by a one-two punch of oil prices and losses in the financial sector following the sub-prime lending debacle.

Of course no one knows how long any market cycle may continue. We have had five previous positive calendar years in stocks (2003-2007). Since World War II, bear markets have averaged fourteen months with a range of three to thirty-one months. And, the stock market recovery usually leads the improvement in the economy. Since there is little positive outlook for the economy currently, most market observers predict continued negative returns through 2008 and perhaps into 2009.

No one can predict the turning point. When the market does reverse course, it usually comes amid negative economic news…and it typically occurs dramatically, with quick daily and weekly increases.

Do's and Don'ts for Investors
We don't minimize the impact on our clients during times like these. Receiving statements with negative returns quarter after quarter is no fun. And many investors are on a fixed income, so watching values diminish can impact lifestyle and one's sense of financial security. But our advice is to stay disciplined, review capital market history and develop a sense of healthy optimism for the future.

Here are a few tips for managing your financial life during the bear market:

DO review the asset allocation of your portfolio. Remember why you chose your current mix of assets (including the probability of losses). Remind yourself that market volatility was anticipated in your investment plan.

DON'T make big strategy changes based on a sense of fear. Bailing out of equities in a down market locks in losses. If you believe you have a conservative risk/return profile, it is generally better to change your allocation after the market bounces back.

DO consider rebalancing your account. Depending on your tax picture, it may be a good time to talk to your advisor about truing up the targets in your portfolio. Also, if you have made recent purchases, you may benefit from realizing some tax losses.

DON'T ignore reality. Keep a careful watch on your finances and recalculate your income needs. Think about whether lifestyle changes are appropriate while markets are weak.

DO look for ways to cut expenses and increase income. In these times of high gas prices and increasing airline costs, everyone should be rethinking travel budgets, food expenditures and ways to cut back on the extras.

DON'T agonize over investment losses. Focus on family, friends and personal interests. Develop an attitude of waiting out the bear.

DO commit un-invested assets to your investment plan. Down markets offer an opportunity for those with cash to invest. If you are still working, continue making contributions to your retirement plan. If you have proceeds from the sale of a business or other property, an inheritance or other windfall income, make a plan to invest it through the down market.

We wrote about Coping with Financial Insecurity in a 2003 article. It's still good advice. Let us know if you'd like a copy and we'll send you one. Also tell us how we might help with your investment needs while we all wait for better future returns.

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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