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July 10, 2003 Dear Client: It was a very good quarter for stocks and bonds. Stock indices gained between 15% and 23%. Bonds gained about 2%, bringing stocks and bonds well into positive territory in 2003. Along with the pleasure of having portfolios increase across the board, we are pleased to see that performance achieved within a well-diversified portfolio. The diversification of your investments among asset classes helps protect your portfolio from the adverse consequences of a single economic event, including oil price inflation, dollar devaluation, interest rate increases, etc. Stock valuations are still higher than their historical average. But low interest rates merit a higher fair value. Think of a twenty-five dollar stock that pays a one dollar annual dividend. The dividend yield is 4%, which compares favorably to current market interest rates. As interest rates increase the 4% dividend yield becomes less attractive to investors. However, if the stock price drops, the dividend yield will increase. At some lower price the dividend yield becomes attractive enough to cause investors to buy the stock. Dividends lost favor after capital gain tax rates were cut to 20% in 1997. Investors preferred stock appreciation to dividend payments. Now that dividends and capital gains are each taxed at 15% we expect that dividends will regain much of their past appeal. An effective way to manage portfolio risk is to endure only as much risk as needed to achieve your financial goals. Your risk tolerance is not determined by answering a few multiple-choice questions on a boilerplate questionnaire, but by working through the financial planning process to prioritize your objectives, examine your spending, allocate your resources and derive your required rate of return. Once you know your required return, your investment portfolio should be designed to achieve that return with the lowest possible risk. We target this risk/return combination in determining your portfolio's asset allocation. Regards, Audrey Grubman, CFP®
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