January 25, 2007

Dear Client:

The major asset classes, shown below, all had positive returns in the fourth quarter and for the calendar year 2006:

Our instincts tell us to expect recent returns to continue into the future, but the likelihood is that they will not. Returns over the last three years have been much higher than historical averages, while the ten year returns are lower than average. This is a result of the very large losses from 2000 to 2002. A prolonged period of higher than average returns increases the likelihood that markets will decline. As you know, market declines are often short and painful.

It is helpful to review one's financial objectives and action plan regularly, and especially when assumptions change significantly. It may be desirable to reevaluate your investment positioning in light of the excessive returns of the last four years, perhaps reducing the exposure to growth investments and increasing inflation-protection assets.

This would be a good time to discuss your options (which is much more fun to do when the portfolio value has grown). If you have any questions or concerns, please contact us so we can set up a time to analyze and discuss your portfolio.

Early Tax Planning

Here are a few tax planning opportunities that should be considered early in the year:

• The deduction for health savings accounts has been increased to $5,650 for a family and $2,850 for an individual, and the deduction is no longer limited to the annual deductible of your specific policy. The HSA deduction is an "above the line" deduction, which reduces gross income, making it much more desirable than claiming medical expenses as an itemized deduction.

• If you have an unused AMT credit from exercising stock options in 2003 or prior years, you will be able to apply 20% of the credit each year for five years. If the credit is less than $25,000 you can claim the full amount in 2007. There is a phase-out based on gross income that should be coordinated with your tax planning early in the year.

• Any taxpayer will be allowed to convert all or part of an IRA to a Roth IRA, regardless of the taxpayer's income, starting in 2010. Currently, conversions are allowed only for taxpayers with income of less than $100,000. To take advantage of the upcoming change, we suggest that you consider making nondeductible IRA contributions starting in 2006, in anticipation of converting the non-deductible IRA to a Roth IRA in 2010.

• Make the most of charitable donations by contributing appreciated assets. By donating appreciated assets, you will avoid future capital gain tax liability, as well as receive the normal deduction for donations. Combined with the regular deduction for charitable donations, you can reduce your taxes significantly, often by more than 50% of the value of the gift. We can help you set up a donor-advised fund to make it easy to donate small amounts to many organizations, or larger amounts to a single cause.

• If you are considering the purchase of a hybrid car you should be aware that the credit depends on the number of vehicles sold by each manufacturer; the more vehicles sold, the lower the credit each quarter. For example, the credit for a Toyota Highlander is $1,300 if purchased before March 31, 2007, but only $650 if purchased between April 1st and September 30, 2007 (by the way, I love my Highlander hybrid).

New Staff

Grubman Financial has grown quite a bit: we currently manage about $95,000,000 of client assets for about eighty families.

Our client retention rate is tremendous: I can think of only three clients that have left us in the ten years we've been in business, two of whom we encouraged to find an advisor who would be more compatible. We have never marketed, instead relying on our clients referrals for new business.

My goal is to upgrade the services we provide to our clients. Towards this objective, Jonathan Wexler joined us a few weeks ago. Jonathan is a CPA with twenty years of experience working with clients in the music industry. He is enrolled in the CFP program at UC Berkeley extension school, has taken the CFP exam, and expects to obtain the CFP credential in 2007.

Jonathan's first duty is to take over the supervision of clients' tax return preparation and to help me respond to clients' financial planning questions. I will continue to manage our clients' portfolios and prepare financial plans. The addition of Jonathan to our team will free me up to spend more time working with clients and to research financial, tax, and investment opportunities for our clients.

If you have any questions please don't hesitate to call us.

Regards,

Audrey Grubman, CFP^®

* MSCI China Equity Index
** Europe, Australia/Asia and the Far East Index