Quarterly Newsletter: December 2008

Click here to view the Index Returns for 4th Quarter 2008
(PDF, 171kb)

Capital Markets
What a quarter. What a year. Analysts have written extensively about the financial year of 2008 and will continue to study it for years to come. In simple terms, this may be the sound bite we'll hear about 2008 in the future: The sub-prime mortgage crisis led to a virtual collapse of the highly leveraged US financial system, which triggered the largest drop in global investment markets since the Great Depression.

Investors saw US stock portfolios drop by 40%. Fixed income assets got hammered as well, leaving many balanced portfolios down by a third. Investors have been forced to review expectations, budgets and lifestyles. The fallout continues into 2009 as investors and their advisors re-evaluate portfolio strategy and risk appetite.

OK...So Now What?
Arbor clients know we don't forecast the market. Through both reading academic research and painful personal experience, we've found that making investment decisions on short-term market predictions is folly...and can be very expensive.

As we start the new calendar year, the breathtaking market drops of October and November have subsided–at least for now. The Dow Jones Industrial Average appears to have settled into a trading range of 8,000 to 9,000–some have argued that we are forming a bottom. The market is still fragile and could be adversely affected by unexpected events. But investors have moved from panic to resignation to perhaps a little relief and a glimpse of hope. Monetary stimulus by the Fed and Treasury has been creative and aggressive. A bold fiscal stimulus package seems right around the corner.

We are not calling an end to the Bear Market. But at fourteen months, this one is starting to reach a median bear market duration. And the current low price-earnings ratios, together with trillions of dollars in cash on the sidelines give some reason for optimism.

Asset Security
Just a reminder–in light of the Bernie Madoff affair: we don't invest in hedge funds. They can be expensive and are under-regulated. Since we are a non-custodial advisor, Fidelity holds client assets in safekeeping. We only invest in vehicles which are subject to strict disclosure and operating rules set by the SEC, such as mutual funds and exchange-traded-funds (ETFs). We believe in taking market risk–we just refuse to put client assets at risk by investing in under-regulated or opaque investments.

Investment Strategies for 2009
We believe that client portfolios must be designed to fit each individual investor. However, here are four broad strategies that apply to many investors now.

Investor Type	Profile	Strategy
Agressive	Sees the current market as an opportunity. Has more than enough assets or income to ride out further market drops. May have free cash flow from work or other sources. Time horizon is long into the future.	Increase equities within the asset allocation to over 70%. Make investments immediately rather than phasing into targets. Commit new cash to underperforming equity classes and more aggressive bond categories.
Moderate	Believes the markets will eventually recover. Has reasonable amount of assets for current lifestyle. Although losses are painful, can ride out further moderate market drops. Intermediate time horizon	Maintain 40-70% equity exposure. Rebalance to original asset allocation targets (depending on the types of bond held). Invest new cash through phasing into targets.
Conservative	Concerned about the possibility of significant lifestyle changes if the markets continue to drop. May have no additional income other than from investments. Time horizon is short to moderate	Maintain an equity exposure range of 20-50%. Hold onto the current allocation for now. Don’t rebalance but re-set targets to the new, more conservative level.
Crisis	The reduced asset level will have a real impact on lifestyle. Investment losses have caused major personal disruption or dislocation. Time horizon is short. Additional losses are unacceptable.	Recognize the new reality and the inability to tolerate further losses. Transfer some or all assets to no-risk assets such as CD’s or Short-Term Treasury Bonds. (Note: This approach precludes participation in a market recovery and can be very costly.)

Other IRA Rules
In late December President Bush signed legislation that suspends the minimum required distributions (MRDs) from IRAs and retirement plans for 2009.

So if you are over 70½ and don't need the income, it is better to leave it sheltered from taxes in an IRA. If you do need income you may be better off to take it from a taxable account. As we begin 2009, we look forward to helping you evaluate alternatives and determine the best strategy.

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.

Return to Newsletter page