An Important Letter From Silver Oak Advisory Group

April 2, 2001


Dear Clients and Friends of the Firm:

As one mutual fund annual report said,

"We are not as smart as we looked last year, nor were we as dumb as we looked the year before. We are patient, rational investors...the most important part of making money is not losing it." Clipper Fund 2000

Investment performance over the last 12 months has created some new believers in diversification. People who scoffed at the idea of putting any part of their portfolios into bonds now realize why stability is not such a bad thing. Of the 12 asset classes we use as portfolio building blocks, only five -- U.S. bonds, cash and real estate -- had positive returns in 2000.

Last year's losses were especially surprising to newer investors. Because most fund investors started trading in the 1990s, they were conditioned by a booming market and many chased after riskier stocks. The average time investors kept their money in a fund declined to less than three years from 5-1/2 years in 1996. Excessive portfolio turnover, combined with a propensity to buy high and sell low (while chasing after high returns), caused the average mutual fund investor to underperform the market by 20 percent over the last 10 years.

The S&P 500 Index was down over 9% for 2000, but individual stocks within the index were down even more. Of the 50 largest stocks in the index, almost half lost 20% or more of their value. The technology-laden Nasdaq Index's decline last year was even more dramatic. 11% of Nasdaq stocks (428 companies) have fallen more than 90%; more than 44% (or 1,700 companies) have lost 50% or more of their value in the past 12 months. The increase in individual stock volatility means you need more than 15 or 20 stocks to reduce risk in a stock portfolio today.

Because the stock markets grew so much in the past decade, and became the place to be for so many new investors, the loss in sheer wealth exceeds anything previously witnessed. Investors have lost more than $4 trillion since the March high of last year. Consider that just $500 billion was lost during the 1973-74 bear market, until recently the worst period for stocks in the post-war era.

What to do now?

Best regards,

Deborah L. Thomas, JD, CFP®
Guerdon T. Ely, MBA, CFP®
Stephen W. Hewitt, JD, CFP®
Peter L. Samson, CFP®

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