I have two thoughts about your portfolio that I wanted to share this morning.  Before I do that, however, I feel the need to note (once again!) how ugly things are in the economy, if for no other reason than to prove that I'm not blind to what's going on around us.

So, here's the weather report: dark and stormy and likely to stay that way for some time.  The financial sector remains weak with continuing fears of more write-downs in bank assets.  The energy sector too is down, as a consequence of plummeting industrial production around the world.  Unemployment rises with each new report and retail demand is weak as consumers focus on paying down debt and building reserves. All signs point to this recession being longer than usual, possibly persisting through the end of this year.  And while Congress just passed the largest stimulus package in history, it's far too early to know if it will have the desired effect. As a consequence of all this, stocks have retreated to near their bear market lows of last November.

Those storm clouds have a silver lining, however.  And it's a big one.

First, based on every credible valuation technique, stocks are priced for extremely high returns.  They are priced for those high returns for the very reason that things are really ugly in the world economy.  It's true that stocks got priced for high returns by having their valuations hammered in a really dramatic and scary fashion.  But for better or worse, that's old news, there's nothing we can do to change it.  What we CAN do is acknowledge the very real silver lining that leaves us with.  Yes, things are ugly out there in the world economy.  Yes, that's taken us on a scary stock market ride over the past year.  But in planning our actions, we have to focus on where we are now, not where we wish we were, or on what we wish we might have done had we possessed perfect foresight.  Right now, the most powerful thing we can do is hold tight to portfolios that are like coiled springs.  It's impossible to say when we'll realize these high returns currently embedded in our portfolios, but see them we will if we stick to the plan.

The second thing I'd like to point out is that, above and beyond the high returns implicit in the stocks that make up the Dow Jones Industrial Average or the S&P 500, your portfolio is positioned for still higher returns.  While it's true that the equities in your portfolio suffered about the same as those in the two Blue Chip averages, your portfolio is actually made up of categories, or "asset classes," that generally offer much higher returns.  The fact that your portfolio did not fall by more than the Dow or S&P 500 while containing significantly more small company and value stocks suggests substantially more upside than downside.

As always, call us if you'd like to talk more about storm clouds or silver linings or anything else.

Dave