1st Quarter 2001 Newsletter
Not since the severe stock market decline of 1973-74 have investors witnessed such a swift and dramatic decline in US equity prices as we
experienced in the First Quarter of 2001. In light of this
market volatility, we have expanded our traditional quarterly commentary in an attempt to
address some of the key questions we believe are on the minds of our investors today.   

Over the twelve month period ended March 31, 2001, the S&P 500 Index declined 22.6%, and the NASDAQ Index was down a crushing 59.8%.
(
1)The current bear market started with the popping of the NASDAQ/tech bubble last March.  It was a valuation bear market that was justified by
stock prices that had gone far beyond rational valuations.  The carnage experienced by both the technology and telecommunication sectors in
particular, served as a catalyst for downside pressure in equity markets throughout the world.

As evidenced by the following table of performance figures for the First Quarter, 2001, it is clear that there has been “nowhere to run, and no
place to hide.”

Major Indices ( )
DJIA        -  8.42%
S&P 500        -12.11%
NASDAQ        -25.51%
Russell 2000        -  6.82%
EAFE        -14.03%

Lipper Fund Categories ( )
Large Cap Growth        -20.78%
Small Cap Growth        -18.58%
Large Cap Value        -  7.05%
Small Cap Value        + 1.05%
Science and Technology        -34.21%
Telecommunication        -26.46%
Global        -14.19%
International        -14.30%
Emerging Markets        -  6.42%


In light of these recent declines, there are a number of important questions that should be addressed at this time:

Have we seen the bottom and where do we expect the equity markets to go from here?

While no one can successfully predict when the market will bottom, it may prove helpful to overview those issues which continue to be of
concern, and those areas which perhaps indicate brighter days ahead.  Bear market enthusiasts continue to focus on the prospect of further
declines in corporate earnings, relatively high valuations for many stocks in the technology sector, the prospect of a hard vs. soft economic
landing and the potential impact of low energy supplies and “brownouts” throughout much of California and the West.  These issues are
representative of the short-term risks currently affecting both the economy and the financial markets.  Without question, economists, investment
analysts and money managers alike will need to closely watch these areas, and many others, to determine their ultimate impact.

While many analysts remain bearish, there is also a growing sentiment on Wall Street that better days may be around the corner.  Those
analysts who are more “bullish” argue that the stock market is oversold and that this may be the time to buy, not sell.  Analysts supporting the
“buy” theory point out that recessions, on average, have historically lasted 11 months and the market generally looks ahead six months. Further,
they point out that interest rate cuts often take several months before they effect the economy. Therefore, as this theory goes, now may be an
appropriate time to buy while the market is currently depressed.

While the jury is clearly still out, this bullish sentiment leads us into a discussion of our second question:

How long may it take to recover from these declines?

Although each market cycle is unique, there are a number of similar down periods historically that we can evaluate to gain greater insight.  The
following table looks at the four previous periods in which the S&P 500 Index was off more than 25%, and the subsequent annualized returns for
the Index over the next one year and two year periods.

S&P 500 Annualized Returns After A 25% Decline
Start of Bear Market        Return One Year After Stocks Had Dropped 25%        Return Two Years After Stocks Had Dropped 25%
12/12/61                                                     35.6%                                                                               27.0%
11/29/68                                                     39.2%                                                                               22.2%
1/11/73                                                     16.0%                                                                               14.5%
8/25/87                                                     27.5%                                                                               28.5%

Source:  Litman/Gregory & Company, LLC  April, 2001 Strategist Commentary. Historical performance may not be indicative of future results.  
Investors cannot invest directly in the S&P 500 Index.

To further understand the concept of “time to recovery” we can look at data that has been developed for us by an industry–leading investment
research firm, Ibbotson Associates, on each of the six Risk/Return Profiles used in our investment management process.                          

The following chart has been developed using the target asset mixes for each Profile, and reflect the historical performance for each of these
target asset mixes from January 1, 1970 through December 31, 2000.  These figures represent the worst performing 12 month period for each
of the Profiles over the past 30 years, and the subsequent number of months it took the Profile to recover from these losses.

Worst 12 Months and Historical Time To Recovery:

Capital Preservation        Balanced Income        Balanced        Balanced  Growth        Growth        Aggressive Growth
-15.93%                           -22.29%              -28.30%                 -32.72%              -36.94%              -38.79%
Sept. 1974                       Sept. 1974          Sept. 1974              Sept. 1974           Sept. 1974        Sept. 1974
8 months                         9 months            16 months              16 months            16 months          21 months

Source:  Ibbotson Associates, March 2001.  Historical performance may not be indicative of future results. Investors cannot invest directly in the
indices utilized to compute the performance of the target asset mixes, which consist of a combination of the Wilshire 5000, MSCE EAFE, and
Lehman Aggregate Bond Indices.  

The above figures clearly indicate that despite the wide spread pessimism that is typical of bear markets, markets have eventually recovered,
and those investors who remained patient and disciplined in their investment strategies were ultimately rewarded.  This observation leads us into
our final discussion, which addresses the most important question we currently face:

What should be your course of action moving forward?

In the Spring of 1998, Dalbar Associates published an important study on investor behavior.  This study pointed out the important difference
between investment returns and investor returns that can be identified by tracking the flow of dollars to and from mutual funds.  

For the period beginning January 1, 1984 and ending December 31, 1997, Dalbar’s research indicated that the S&P 500 and the
Small
Company Stock indexes were up 17.18% and 12.46% per annum respectively, while the average equity fund investor was up only 6.71% per
annum. (
3)   

The considerable difference in these returns is attributed to the short-term buy and sell activity of investors as they chased the latest “hot”
segment of the market.  The lesson to be derived from this study is that individual investors all too often let current market circumstances and
emotion dictate their investment decisions, which led to poor long-term results.

Not more than a year ago, investors were eagerly buying technology stocks and bidding up prices to unprecedented valuation levels.  Greed
and euphoria dominated the investment markets as many investors abandoned more diversified strategies to pursue the higher returns offered
by “New Economy” stocks. Many investors who chose to overweight their portfolios to growth and technology have experienced significant losses
over this past year.  

Today’s investment landscape is obviously quite different.  Greed and exuberance have been replaced by concern and uncertainty.  Individual
security selection has begun to refocus on investment fundamentals such as earnings, dividends and valuation levels.  “Old Economy” stocks
have grudgingly come back into favor.  
Diversification is being offered as the proper medicine to cure current market ills.  Risk management is
back in vogue as an important means of attempting to reduce volatility and protect investment capital.

We continue to adhere to an investment philosophy that promotes broad asset class diversification as an effective means of meeting long term
investment objectives.  Furthermore, we have developed relationships with industry leading institutional investment firms which we believe bring
great capability to portfolio strategy and asset allocation decision making.  We remain confident that all of our strategies maintain a keen eye
towards managing portfolio risk and volatility commensurate with each risk/return profile.

We recognize that current performance figures may be disappointing and discouraging, but the events of the last quarter and over this past year
are not unprecedented, nor are they entirely unanticipated based on historical market patterns.  The downside volatility that we experience from
time to time is not only to be expected, but serves as the basis upon which investors have enjoyed the historically higher rates of return offered
by equity investments.  

It is during these trying times that we must continue to rely upon the relevance of the investment process and stay disciplined, patient and
committed to our long-term strategy.  We must resist the temptation to alter our course in response to changing emotion and sentiment.  The
historical evidence is clear; those investors who remained disciplined in times of market uncertainty had the best opportunity to participate in
market recoveries and ultimately realize better investment returns.

Our recommendation at this time is to stay the course.  Unless your financial circumstances have changed significantly, we believe that your
portfolio is properly positioned to meet your long-term objectives.  If you have discovered during this period that you are increasingly
uncomfortable with the level of volatility in your portfolio, it may be an excellent time for us to reevaluate the appropriateness of the current
Risk/Return Profile in which your portfolio is invested.  As always, we welcome the opportunity to review your individual circumstances and we
appreciate the opportunity to be of service and support during this trying time.


Regards,



Robert Valentine



Endnotes:
1   Source: Wall Street Journal, April 2, 2001.
2   Source: Wall Street Journal, April 9, 2001.
3   Source:  Dalbar Quantitative Analysis of Investor Behavior Study.  Spring, 1998.
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