October 24, 2005

Dear Client:

The third quarter gave us mostly positive investment returns for equities, and a small loss for bonds. Returns for the major indices are shown below, as well as the composite return for a hypothetical portfolio made up of 75% equity and 25% bonds:

Consumer prices are on the rise. The Social Security Administration announced a 4.1% cost-of-living-adjustment ("COLA") for 2006 benefits. The average benefit received by a retired couple will increase by $1,020, to $19,776 per year.

At the same time, the Social Security Administration announced that Medicare premiums will increase by $124 next year, taking back a significant piece of the adjustment.

The Consumer Price Index for the San Francisco-Oakland-San Jose area has increased 5.2% in the first eight months of 2005 alone, before Katrina caused oil price spikes, and before the recent projections of 50% increases in natural gas prices this winter.

Data from the U.S. Bureau of Labor Statistics

Retirees that depend on Social Security benefits and/or bond income will be hit hard by inflation. For years, the COLA adjustments have not reflected retirees' living expenses. The COLA adjustments reflect a "basket" of consumer items, but retirees' expenses are disproportionately weighted towards health care and energy costs. The inflation rate for these items has been much higher than the basket of consumer prices surveyed by the Bureau of Labor Statistics.

Currency effects illustrated. In our investment update letter dated January 17, 2005, I gave an example of the effect that a rising U.S. dollar would have on euro-denominated investments. We have a real life example now, where the U.S. dollar has appreciated 9% relative to the euro since January 1, 2005. At the same time, foreign stocks have gained 18%. When converted back to U.S. dollars, those gains are reduced to 9.8% YTD^1,2.

The prospects for economic growth and productivity improvements in other countries make it important to hold foreign equities as well as U.S. investments, despite recent currency movements.

Free Money. Increasing inflation, decreasing long-term bond rates, skyrocketing U.S. budget deficits and high security valuations do not paint a rosy investment picture. One thing we can control, however, is your investment costs.

Fidelity recently created a new class of their leading index funds with expense ratios of 0.07% of assets per year.

The average actively-managed U.S. large cap mutual fund charges an expense ratio of 1.27% of assets each year.

Let's assume you invest $500,000 in the Fidelity Spartan Index 500 fund, with an investment return of ten percent per year before expenses. After deducting 0.07% expenses each year, in twenty years the $500,000 will have grown to $3,363,750³.

The same $500,000 invested in the average actively-managed fund for twenty years would grow to $2,666,599, after deducting expenses of 1.27% per year. Ouch!

Fidelity automatically converted positions of $100,000 or more per account in Spartan 500 Index and Spartan International Index to the lower expense ratio funds on October 17, 2005. Grubman Financial continues to use low-cost passively managed funds and exchange-traded funds as the core investment strategy in our portfolios.

If you have any questions, please do not hesitate to contact us.

Regards,

Audrey Grubman

¹As measured by the MSCI EAFE index.
²The EAFE index consists of stocks from Europe, Australia and the Far East.
³Taxes not considered in this example.