January 2008

Happy New Year!

It's another new year and we want to update you on our happenings at Silver Oak.

First we want to extend our Congratulations to Jessi, who successfully passed her CFP comprehensive examination and is on her way to becoming a Certified Financial Planner®. With this additional education and training, Jessi will be better able to assist our clients with questions and planning issues.

And Big Kudos to Ben, who completed the last of his "Three E's" (Education, Ethics and Experience) and received the designation of Certified Financial Planner®. We are thrilled to have Ben and Jessi as Silver Oak's next generation of planners.

We are sorry to be losing our part-time file and computer clerk, Laura Herburger, to a full time job at another firm. Laura has worked for us for over two years doing many essential tasks to keep our office running smoothly.

Replacing Laura will be Arlene Holmes, graciously coming out of her retirement to help us out.

Thanks to referrals from our clients and friends of the firm, we completed 50 planning projects in 2007 and increased our ongoing investment advisory clients to over $100 million in managed assets. We appreciate your continued confidence in our work!

Deborah is going to limit the amount of hourly consultation work she does this year in order to focus more on her ongoing management and retainer clients. New planning clients will meet with Steve, Ben and/or Jessi; Deborah will still be available for particular questions and work review.

As we mentioned in the last newsletter, we have added a new workshop, Getting Started, targeted at younger adults who are just starting out financially. The debut class was well received so we will be holding another one on April 12th.

We are changing the date of the April New Client Orientation workshop from April 30 to April 26, from 9:30 to 11:30 am. New invitations will be sent out. The February 2nd event is almost full.

We look forward to serving you in the years ahead. 2008 will be our 17th year of business at Silver Oak Advisory Group. With almost a third of our management clients with us from 10 to 17 years, we appreciate the trusted relationship we share with so many people.

Thank you!

Cleaning out Files?

If one of your New Year's Resolutions is to clear out your files of paperwork at home, remember that you can bring any sensitive material to Silver Oak to be added to our monthly professional shredding service.  You want to safeguard your personal information by destroying documents such as:

Market Volatility & Emotions

The subprime mortgage crisis and halting real estate sales are yet another reminder that markets are inherently volatile.  There are no investment products or strategies that can capture all of the upside of rising markets and avoid all of the losses on the downside.  Every investment strategy entails some kind of risk. 

The key to consistent long term investment performance is to try to secure most of the upside in good markets and avoid significant losses when the markets are down.  We believe the best way to do this is through prudent asset class diversification.

Yet even broadly diversified portfolios will experience drops in value, and those drops often produce corresponding drops in the pit of your stomach.  The latest stock market pullback has unnerved many investors; for the week ending January 15 investors pulled an estimated $18.2 billion from mutual funds (primarily moving from equity funds to bonds and cash).  So far this year, investors have shifted about $41.4 billion out of these investments.  Unfortunately for many, by the time they do their selling, the majority of the damage has already been done.

Although these market timers may have been happy about  missing some of the downturn in equities, they could be regretful if they try to time their reentry to the market and miss a rebound.  As noted by Roger Gibson in his new 4th edition to Asset Allocation, "much of the problem with market timing is that a disproportionate percentage of the total gain from a bull market tends to occur very rapidly at the beginning of a market recovery.  If a market timer is on the sidelines in cash equivalents during this critical time, he is apt to miss too much of the action." (p. 78)

"It is actually more important to correctly forecast a bull market than a bear market, yet professional market timers most often stress capital preservation and the ability to avoid losses as the major benefits to be derived from their services." (Gibson, p. 79)

So what can we do with our very human reactions to market downturns?  Studies have shown that we experience losses much more intensely than we enjoy gains, and this can be exaggerated if we are also dealing with other losses in our life such as divorce, illness or job insecurity.

The key for some people may simply be not to pay attention to the financial news (although it can be very challenging to accomplish this).  For others, a little education about the history of markets and their returns can be helpful (which is why we do our New Client Orientation workshops).

Primarily, it is critical for each individual to determine their personal tolerance for volatility and their emotional response to it, and this will determine what mix of stocks and bonds is right for them.  If you’re doing panic selling and market timing, you probably need to change your mix.

“He that cannot abide a bad market, deserves not a good one.”
 John Ray (1627-1705) English Proverbs, 1678

2007 Year in Review

Although most asset classes produced positive returns for 2007, investment performance was below average in nearly all of the 11 asset classes we track (see chart below). Only three asset categories--Tangibles, Long-Term Bonds, and International Large Company Stock--were above their historic averages. 

Large Company U.S. Stocks had a tough year and the index was beaten by Intermediate-Term Bonds for the first time since 2002 and by Large Company International Stocks for the sixth year in a row (see the Historical Investment Returns table on the reverse side). Tangibles was the best performing asset class in 2007 and the worst performing asset class in 2006. Conversely, Real Estate was the best performing asset class in 2006 and the worst in 2007.

One factor in the Real Estate downturn was the availability of credit, especially in the subprime mortgage market. Several major lenders including Citigroup, Merrill Lynch, Morgan Stanley and Bear Stearns couldn't resell their packaged mortgages and all wrote off billions of dollars on their balance sheets. This encouraged the Federal Reserve to lower the federal funds target rate several times from 5.25% to 4.25% (and another 1.25% again in January 2008).

The U.S dollar declined against most major currencies in 2007 and that helped the return of most international investments. Specifically, the dollar declined 11% versus the Euro and nearly 20% versus the Canadian dollar.

Lastly, rising tensions in the Middle East and global economic uncertainty pushed oil prices up over 57% for the year.

There was, as always, lots of news for the markets and "experts" to react to. As per the usual case, each expert seems to have very different opinions about what this news will mean for the market. On December 10th, Morgan Stanley released a forecast that suggested that a "mild recession is now likely." This is usually a bad sign for equity investments (like the S&P 500), but that same day Morningstar analysts released a statement claiming that "the S&P 500 is about 8% undervalued, which translates into a 13% expected long-term [3-year] return."

At Silver Oak we don't claim to know what the future holds but we do our best to help you build an appropriate investment strategy to meet your financial and life goals over the long-term.

Historical vs. 2007 Returns

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