Sports are often said to be a metaphor for life, and every four years the Olympic Games provide us with an inspirational view of athletic prowess. Through endurance athletes, in particular, we are offered the chance to witness perseverance in the face of adversity. This year in particular investors may appreciate marathon runners who, at the 20th mile of the race, contending with the smog and heat of Beijing surely ask themselves whether they have made a rational choice. Amidst the pain and anxiety, is it best to continue, or is it better to come back and try again in four years, when conditions might be better? Successful investors, like triumphant athletes, will above all know themselves, and cling tenaciously to a strategy fitted to suit their strengths.

Indeed now, if ever, is the time for a “gut check” (defined by Webster’s as “a test of one’s nerve, courage, or determination”). The news is bad, and has pushed the U.S. stock market into bear territory. The crisis in credit markets shows no sign of abating. Fannie Mae and Freddie Mac (U.S. government sponsored enterprises), which own or guarantee over $5 trillion in mortgages, when faced with potential insolvency prompted the government to confirm its “implicit guarantee.” The price of oil is near an all time high, and the specter of “stagflation” looms.

Through the second quarter every asset class except short-term bonds and gold had suffered a year-to-date loss. We realize that you are inundated with a blizzard of information and “noise” from every conceivable direction. Pundits, salesmen, politicians and publishers speak endlessly of markets, the economy, products and policy. Investing seems a bewildering challenge; amidst this confusion doubt inevitably arises.

But doubt, to the extent that it provokes second-guessing, is perhaps an investor’s worst enemy. The best way to steel one’s resolve in these circumstances is to review the logic both for adopting a structured portfolio approach in the first place, and for continuing to adhere to your plan. There is in fact little to fear, as long as you are comfortable in the knowledge that your financial fate is largely in your own hands, and that rational investing is not complex. When doubts arise, we recommend that you ask yourself three simple questions:

1. Do you accept that capitalism, private enterprise and free exchange have provided dramatic improvements in the human condition over the past three centuries and that human productivity will continue its rapid advance?

2. Do you accept that the extent to which you participate in this long-term prosperity depends on your willingness to put your savings at risk?

3. Do you accept that risk is manifested in the form of occasional bear markets that are inevitable, unpredictable and can be severe and sustained?

If you answered yes to all of these questions, it should be apparent that staying the course is not only a good option; it is the only rational course of action to pursue. It is also important to keep in mind that the current reversal, like others before it, was largely precipitated by, and now is being further accelerated by very large institutional investors. Abundant credit and skyrocketing asset prices often end abruptly and vicious cycles form whereby tumbling asset values and sharply curtailed liquidity force large financial firms, pension funds and other large entities with explicit capital or statutory reserve requirements, to sell assets and raise equity. This of course only further reduces asset prices. Most individual investors may “feel the pain” but those who truly have a long-term investment horizon typically do not face the constraints that these institutions cannot escape. Following their lead by reducing equity exposure invariably proves to be unnecessary and unwise.

While others panic you can rest assured that risk can be managed prudently through the application of statistical reasoning. Our job is to continually refine our search for asset classes and investment vehicles that have historically withstood the gyrations of the market, so that you can maintain a portfolio suited to your needs. The race goes not to the swift, but to those who keep running.

Also in This Issue:

Quarterly Review of Investment Policy
The Trouble with Freddie and Fannie
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles