STANDARD AND POORS 500 INDEX GAINS AND LOSSES

(WITHOUT DIVIDENDS)

Your returns are actually higher since the dividends would normally be included in most analyses. But this points out the volatility of the market for almost 70 years. While the past is not a direct indicator of the future, it sure is a good place to start.

S&P 500 HIGHS AND LOWS

50 YEAR RETURNS: Stocks have consistently outproduced anything else. That's why you can sometimes be wrong in your investment selection but still end up on the plus side of the balance sheet.

1946- 1995

	Average	Highest	Lowest
S&P 500	11.95%	52.6%	-26.5
Small Company	13.8	63.6	-30.9
Long Term Corporate	5.8	42.6	-8.1
Long Term Government	5.3	40.4	-9.2
Intermediate Government	5.9	29.1	-5.1
30 Day Treasuries	4.8	14.7	0.4
Inflation	4.4	18.2	-1.8

RETURNS: (Lipper)

Investment Objective	3rdQuarter 1996	Year to Oct 1	One year	5 Years	10 Years
Capital Appreciation	2.08	13.44	15.85	14.29	12.62
Growth	2.94	13.25	16.30	13.84	13.34
Small Com.	1.65	16.76	18.58	16.63	14.25
Mid Cap	3.10	14.82	16.32	15.59	14.68
Growth & Income	2.89	12.41	17.55	13.88	12.90
Equity Inc	2.84	10.66	17.06	13.29	11.60
Global	0.50	11.722	12.92	11.24	11.35
International	-0.97	8.77	9.43	9.55	9.52
Stock/Bond Blend	2.47	7.77	12.09	11.13	10.33
Short Term Debt	1.62	2.59	5.16	5.73	6.64
Intermediate Corp Debt	1.80	0.38	4.48	7.07	7.63
Intermediate Gov't	1.61	0.23	3.97	6.15	7.19
Long Term Corp	1.49	-1.69	3.06	6.75	7.38
High Yield	4.62	9.74	12.63	12.54	9.37
Mortgage Bonds	1.79	1.83	4.55	5.67	7.54
World Inc	4.33	7.41	12.38	6.33	8.65
Short Term Muni	1.28	2.25	3.89	5.17	5.30
Intermediate Muni	1.76	1.54	4.36	6.15	6.64
Long Term Muni	2.29	0.94	5.69	6.94	7.35
High Yield Muni	2.32	1.73	6.01	7.09	7.45
Insured Muni	2.44	0.77	5.97	6.68	7.13

MUTUAL FUND BENCHMARKS:

Investment Objective

3rdQuarter 1996

Year to Oct 1

One year

5 Years

10 Years

DJIA w/div	4.64	16.95	25.72	17.47	16.45
S&P 500 w/div	3.09	13.49	20.32	15.21	14.97
Small Co Index	0.63	12.14	14.63	16.29	NA
Lipper Index Europe	1.76	14.46	14.25	10.56	NA
Lipper Index Pacific	-2.65	3.45	5.05	8.58	NA
Lipper LT Gov't	1.58	-0.56	3.39	5.94	6.93
Avg Stock Fund	2.61	13.73	16.90	14.49	13.48
Avg. Bond Fund	2.41	1.83	6.62	7.49	8.02

ASSET GROWTH: Here are some statistics on the growth of various asset classes though 12/13/96 from Morningstar.

Real Estate	26.69%	Maximum Growth	11.61
Natural Resources	25.94	Multi Global	11.11
Financial	24.45	Health	10.43
Technology	21.29	Foreign	9.45
Growth & Income	19.06	Diversified Emerging Markets	8.65
Europe	18.42	Utilities	7.16
Growth	17.45	Precious Metals	6.91
Equity- Growth	16.67	Communications	5.90
Small Company	16.66	Pacific	3.96
World	13.92	S&P 500	20.73
Specialty- miscellaneous	13.74	US Diversified Equity	17.30
Balanced	12.17	All Equity Funds	15.35
Asset Allocation	11.64

Did I diversify? Of course! Depending on the client I used various amounts of technology, growth, small cap, S&P, bonds, real estate, etc. Overall return was acceptable but, most importantly, it was done with less risk than the market overall.

O'Shaughnessy Capital Management did a study over a 60 year period to determine the long term performance of 60 different investment strategies. What was particularly interesting was that there were several methods that handily beat the S&P index from 1954 to 1994.The main winner was VALUE- low prices relative to their sales, earnings or book value. You buy them with the expectation that they will essentially do "reversion to the mean"- move up in price to correspond with similar companies. The main commentary about beating the S&P was the statement that the strategy requires a "sticking to it". Trying to change investment philosophy to match the new economics was shown not to work. Just plugging away at the same strategy consistently showed well over time. Will that work in the future? Possibly but the past is not necessarily a precursor of the future. But that long streak of history cannot be dismissed.

AVERAGE ANNUAL RETURNS OF SELECTED INVESTMENT STRATEGIES 1954- 1994

Low Price/Sales Ratio	15.4%
Low Price/Book Value Ratio	14.4
High One Year Relative Price Strength	14.0
Low Price/Cash Flow Ratio	13.6
High Return on Equity	12.1
S&P 500	11.0
High One Year EPS Gain	10.7

Caution advised in using this however in that a lot of things have changed in the past 15 years- most notably inflation and interest rates. Don't always plan for the future to continue the way it has. Read O'Shaughnessy's book.

1996- Here are returns for most countries (Birinyi Associates) and some of my commentary following

Algeria	24.8	Hong Kong	33.5	Morocco	27.1	Taiwan	34.4
Australia	10.0	Hungary	170.7	Nepal	9.2	Thailand	-35.1
Austria	18.8	Iceland	59.4	Netherlands	33.6	Turkey	135.6
Barbados	-1.6	India	-1.4	New Zealand	9.8	United Kingdom	11.6
Belgium	21.5	Indonesia	24.1	Nigeria	36.6	United Stats	26.0
Bermuda	-5.8	Iran	57.7	Norway	32.2	Uruguay	-64.7
Brazil	63.8	Ireland	23.0	Pakistan	-10.4	Venezuela	228
Bulgaria	-25.8	Israel	0.8	Panama	24.7	Zimbabwe	121.5
Canada	25.8	Italy	13.0	Peru	13.3
Chile	-14.6	Ivory Coast	77.4	Philippines	22.2
China	144.6	Jamaica	11.7	Poland	87.4
Columbia	11.6	Japan	-2.6	Portugal	32.5
Costa Rica	44.0	Kenya	-10.3	Russia	170.5
Czech Republic	27.1	Korea	-26.2	Saudi Arabia	12.5
Denmark	28.3	Kuwait	38.3	Singapore	-2.2
Egypt	37.5	Lithuania	28.3	South Africa	-1.3
Finland	52.0	Malaysia	24.4	Spain	39.0
Germany	28.2	Mexico	20.8	Sweden	38.0
Greece	2.0	Mongolia	17.7	Switzerland	19.5

If you looked solely at these numbers, you could say that you really missed the boat by not investing in Russia, Turkey, Hungary, etc. However, what should be equally obvious is 1. market timing- the ability to know which market will do well and when- is not viable and 2. The risk of investing in these markets is enormous. Yes, international funds, even including emerging markets, are viable for asset allocation. But tell me, what was the overwhelming prognosis for the U.S. economy at the beginning of 1996? Strong. Research and reading on economics helps define good markets and the need for rebalancing. Do your homework.

Summary- If I had to focus on a long term strategy, I'd carefully analyze the statistical information in What Works On Wall Street, couple it with current economics and add a slice of the new world order- technology. Admittedly, technology is a sector, but I believe it is an area unique to itself within the last 10 years that will key the future of the world. No, I wouldn't put everything there- too much risk- but the risk/reward relationship should be viable to many investors.

UP AND DOWN: The Dow is regaining its losses much faster in recent years.

Selloff began Dow Low Drop # Trading days to recoup

1/31/94 4/4/94 9.7% 222

9/14/94 11/23/94 7.1 56

5/22/96 7/23/96 7.5 38

3/11/97 9/11/97 9.8 17

FUND PERFORMANCE: 1998 (WSJ) Described previously, just because a fund does well in the past is NOT a definite precursor that it will do so in the future.

There is a good correlation for the following year, but here is a chart that gives a more complete description over greater periods of time.

Average for Years later

One Two Five

1984 Top 10 31.2% 53 111

All funds 28.6 47 116

1985 Top 10 18.0 18 65

All funds 14.7 17 59

1986 Top 10 3.8 21 112

All funds 1.3 17 90

1987 Top 10 13.3 41 93

All funds 16.1 46 106

1988 Top 10 30.0 16 124

All funds 25.6 18 101

1989 Top 10 -7.5 46 83

All funds -5.9 29 58

1990 Top 10 47.5 55 119

All funds 37.0 50 121

1991 Top 10 13.9 41 96

All funds 9.8 25 92

Just remember that the top 10 funds each year are NOT the top ten funds from the year before.

LOADED FUNDS OUTPRODUCE NO LOADS: (Ticker Magazine 1998) Seems like an impossibility doesn't it? Not quite. Dalbar looked at the returns investors actually received and concluded that over the 12 year period ending in 1995, investors using direct marketed equity funds (no loads) had total returns of 97.9%, while those sold by an broker with a load produced a 114%. At first glance this doesn't make sense, but when you add in the psychology of various investors, it becomes very clear as to what is happening.

While I might rail at the fact that brokers have little training, it is still usually greater than that of the average investor. This increased understanding of the marketplace normally dictates that monies stay invested for longer term growth rather than going in out and attempting market timing as many individual investors to. Hence, though an individual investor is paying less for the no load funds, they lose that edge and more as they try to move in out of the market for some supposedly extra gain. They just haven't done their homework and it shows.

Percentage of Funds Outperformed by Benchmark ending 1998. (Large caps- 10 years; medium and small cap- 5 years)

Value	Blend	Growth
76%	91	86
82%	82	81
64%	50	28

S&P 500 Returns (1999)  

Date Return(%)12/88 1.745%      01/89 7.323%         02/89 -2.492%

03/89 2.333%    04/89 5.192%       05/89 4.046%     06/89 -0.567%      07/89 9.029%

08/89 1.955%     09/89 -0.406%    10/89 -2.322%    11/89 2.039%       12/89 2.401%

01/90 -6.714%    02/90 1.288%     03/90 2.650%     04/90 -2.495%      05/90 9.751%

06/90 -0.675%    07/90 -0.321%     08/90 -9.039%    09/90 -4.867%  10/90 -0.426%

11/90 6.464%    12/90 2.786%      01/91 4.355%      02/91 7.152%      03/91 2.422%

04/91 0.237%      05/91 4.314%    06/91 -4.581%     07/91 4.661%     08/91 2.369%

09/91 -1.673%     10/91 1.344%     11/91 -4.029%    12/91 11.437%   01/92 -1.863%

02/92 1.295%     03/92 -1.945%     04/92 2.936%      05 /92 0.490%   06/92 -1.488%

07/92 4.085%      08/92 -2.047%     09/92 1.175%    10/92 0.345%    11/92 3.405%

12/92 1.227%      01/93 0.836%      02/93 1.363%    03/93 2.110%     04/93 -2.417%

05/93 2.675%      06/93 0.293%     07/93 -0.402%     08/93 3.794%    09/93 -0.767%

10/93 2.069%      11/93 -0.953%   12/93 1.209%0       1/94 3.400%   02/94 -2.714%

03/94 -4.360%      04/94 1.282%    05/94 1.641%      06/94 -2.451%  07/94 3.284%

08/94 4.100%      09/94 -2.445%     10/94 2.247%     11/94 -3.642%  12/94 1.483%

01/95 2.593%      02/95 3.897%       03/95 2.951%       04/95 2.945%   05/95 3.997%

06/95 2.323%      07/95 3.316%       08/95 0.251%      09/95 4.220%   10/95 -0.357%

11/95 4.390%      12/95 1.926%    01/96 3.404%        02/96 0.927%   03/96 0.963%

04/96 1.474%      05/96 2.579%    06/96 0.381%       07/96 -4.418%    08/96 2.109%

09/96 5.628%      10/96 2.758%    11/96 7.559%      12/96 -1.981%     01/97 6.248%

02/97 0.784%      03/97 -4.109%   04/97 5.970%       05/97 6.088%      06/97 4.480%

07/97 7.957%       08/97 -5.602%  09/97 5.477%    10/97 -3.340%     11/97 4.629%

12/97 1.717%      01/98 1.106%    02/98 7.212%      03/98 5.121%      04/98 1.006%

05/98 -1.719%     06/98 4.062%     07/98 -1.065%    08/98 -14.458% 09/98 6.406%

10/98 8.134%      11/98 6.061%    12/98 5.762%       01/99 4.182%   02/99 -3.108%

03/99 4.001%      04/99 3.873%    05/99 -2.361%      06/99 5.550%    07/99 -3.122%

08/99 -0.495%     09/99 -2.741%   10/99 6.328%        11/99 2.033%

HISTORICAL RECORD 1926-1993

                               Average Return          Standard Deviation

Common Stocks       12.3%                     20.5%

L-T Treasury Bonds 5.4%                         8.7%

Treasury Bills            3.7%                        3.3%

Inflation                    3.2%                         4.6%

1999 Mutual Fund statistics (Lipper) The average US diversified equity fund finished out the year ahead of the S&P 500 Index. (Or did it?) Through 1/13/00, the average managed fund gained 26 percent for the year while the S&P 500 added 20 percent for the period. The point being is that the S&P 500 still beat most funds- it outperformed 56 percent of all general equity funds this year. It's just that certain funds- buoyed by a few tech stocks- did remarkably well.

In 1998, the S&P gained 29 percent vs. only 12 percent by general equity funds. The same held true in 1997 with gains of 33 percent vs. 23 percent and 23 percent vs. 19 percent in 1996.

If you want to cover a broader base, the Wilshire 5000 Index outperformed 60 percent of all general equity funds. Over the last ten years, the Wilshire 5000 has outperformed 78 percent of general equity funds.

There are only six such funds that have actually been around since 1989, and they averaged 17.6 percent annually to the S&P's 18.2 percent.

Macroeconimc Performance by Decade

	1960s	1970	1980	1990s
Real GDP Growth	4.4	3.3	3.1	3.1
Labor Productivity Growth	2.9	2.0	1.4	1.9
Employment Growth	1.9	2.4	1.7	1.3
Unemployment Rate	4..8	6.2	7.3	5.8
CPI Inflation Rate	2.3	7.1	5.6	3.0
S&P Real Total REturns	6.6	-0.5	12.9	15.9

Balanced Funds/Asset Allocation: Are such funds roughly 60% stock and 40% bonds? And what stocks do they use anyway.

This shows that there still is an element of management in the most basic of funds.

Fund	Stock	Bond	Cash
Vanguard Balanced	58.8% (32.9% tech, 14.5% services, 13.6%  Financial)	39.3%	1.9%
Merrill Lynch Balanced	61.6% 22.1% Financial, 18.6% Industrial, 11.7% Tech	32.6	5.8
Prudential Balanced	43% (22.9% tech, 18.3% Financial, 13.9% services)	28.1	28.9
MFS Total Return	55.6% (26.6% Financial, 15.2% Services, 13.7% Energy)	36.5	1.5 (6.2% other)

The general consensus would be that all balanced funds are the same- or close. A couple have similarity in the amount of stock, but the distribution is all different. And maybe you think the bonds are close. But what returns, ratings, calls and maturities? What are the separate durations?

For all intents and purposes, you are still dealing with managed funds.

A record?: (NY Times) For the year 2000 through Nov. 30, some 59 percent of United States diversified equity funds beat the S.& P. 500, according to Morningstar Inc. If enough of them can hold on to their leads through Dec. 31, it will be the first time in seven years that active managers have beaten the S.& P. for a calendar year.

But if you break them down into categories- small cap, value, etc., Only four of the nine fund categories beat their benchmarks for the first 11 months of 2000. In the five other instances, the index beat the average fund in its category, even if only by a fraction of a percentage point.

Year	3 Month Treasury	30 Year treasury (coupon)	30 Year Treasury (total Return)	S&P 500 Total Return
1990	7.5	8.6	6.3	-3.2
1991	5.4	8.8	18.5	30.6
1992	3.4	7.7	8.0	7.7
1993	3.0	6.6	18.9	10.0
1994	4.3	7.4	-7.6	1.3
1995	5.5	6.9	30.7	37.6
1996	5.0	6.7	-0.8	23.0
1997	5.1	6.6	15.1	33.2
1998	4.8	5.6	13.5	28.6
1999	4.6	5.9	-8.7	21.0
2000	5.9	5.6	20.3	-9.1

Survivorship Bias (Larry Swedoe)  (2001)"In the most comprehensive study ever done on mutual funds, covering the period 1962-1993, Mark Carhart found that by 1993 fully one-third of all funds in his sample had disappeared. (1) In 1996, 242 (5%) of the 4,555 stock funds tracked by Lipper Analytical Services were merged or liquidated. Let’s see why survivorship bias is so important. In 1986 the then existing 586 stock funds returned 13.4%. By 1996, the 1986 performance had magically improved to 14.7%. How did this 1.4% improvement happen? Twenty four percent of the funds disappeared. (2) As another example, for the 10-year period ending in 1992, capital appreciation funds reported an average appreciation of 18.08%, versus a return of only 17.52% for the S&P 500 index. Once the survivorship bias is eliminated, the returns of all capital appreciation funds that existed during the same 10-year period drops to 16.32%. Actual returns to investors were not only almost 2% per annum worse then they initially appeared to be, but they were also about 1% below the return available to investors in S&P 500 index funds. (3)

Two other studies confirm this view. Lipper Analytical Services found that the return of all general equity funds for the 10-year period they studied was 15.7%. This was 1.5% below that of the funds that existed at the end of the period (the survivors) and almost 2% below the return of the S&P 500. (4) The second study found that over the 15-year period ending December 1992, the annual return of all equity mutual funds was 15.6% per annum. When you include all the funds that failed to survive the entire period, the annual return dropped to 14.8%. The cumulative difference in returns was 781% versus 689%. (5)

The survivorship bias problem has increased in recent years as mutual fund families try to bury poor performance. In 1998 alone, 387 stock and bond funds were merged out of existence, an increase of 43% over the previous year. A further 250 funds were liquidated due to investor redemptions. In the first quarter of 1999, the number of vanishing stock funds jumped 74%. (6) The trend managed to accelerate even further in 2000 as 451 funds were shut down (223) or merged out of existence (222)."

2001

Year	3 Month Treasury	30 Year treasury (coupon)	30 Year Treasury (total Return)	S&P 500 Total Return
1990	7.5	8.6	6.3	-3.2
1991	5.4	8.8	18.5	30.6
1992	3.4	7.7	8.0	7.7
1993	3.0	6.6	18.9	10.0
1994	4.3	7.4	-7.6	1.3
1995	5.5	6.9	30.7	37.6
1996	5.0	6.7	-0.8	23.0
1997	5.1	6.6	15.1	33.2
1998	4.8	5.6	13.5	28.6
1999	4.6	5.9	-8.7	21.0
2000	5.9	5.6	20.3	-9.1

UP or DOWN and for How Long? (2001) "If an investor entered the market during the last century when the Dow was one standard deviation above its long-term trend line - an exuberant bull market top - how long did they have to wait? For an investor who got in at the top in 1929, it took until roughly 1960, in inflation adjusted returns, to merely break even on his investment. At the next big bull top in 1968, it took until the early 1990s to break even - or about 25 years. Also, these are simply break-evens after inflation, a 0% return. These figures do not include dividends (data from Siegel, p. 59). Leuthold (InvestmentNews, 5/21/2001) notes that an investor at the peak in 1929 took until August 1998 - almost 69 years - to reach a nominal return of 10% on his money, including dividends. After inflation, this is a yearly return of about 7%. It took investors 69 years to reach the long-term expected return from stocks.

In addition, from its peak in 1929, our long-term investor had to endure an 86% decline in the value of his portfolio to its low in July 1932. The Dow Industrials holds some of America's largest and financially soundest companies, and cannot be considered an aggressive or speculative part of the stock market. Yet, investors choosing this relatively conservative sector would have required extraordinary nerves, and several decades to achieve average long-term stock returns on their investment, far more than can be realistically expected."

Returns

Short-Term Returns      1 wk to 9/30        1 mo to 9/30       1 yr to 8/31

Russell 2000                     +6.86%          -13.59%              -11.55%

Russell 3000                     +7.53%             -8.91%               -24.52%

Dow Jones Industrial          +7.43%           -11.08%               -9.86%

Nasdaq                           +5.31%               -16.98%              -57.08%

S&P 500                       +7.78%                -8.17%                -24.38%

3-month T-bill             N/A                       N/A                       5.08%

VG REIT                   -0.85%                   -2.10%                  19.15%

Annualized Returns         5 yr to 8/31       10 yr to 8/31

Russell 2000                   11.71%             8.46%

Russell 3000                  12.54%              13.25%

Dow Jones Industrial      14.00%             15.07%

Nasdaq                          9.60%               13.13%

S&P 500                       13.33%               13.45%

3-month T-bill                 5.23%                  4.82%

MSCI EAFE ND            5.76%                N/A

MSCI World ND           5.19%                6.78%

http://indexfunds.com/indexes.htm

Stock returns: (Johnathan Clements 2002) From 1925, the S&P 500 earned more than 10% a year. According to Ibbotson's Peng Chen and Roger Ibbotson, 4.2 percentage points of that return came from dividend yield, almost 5 points from growth in normalized earnings per share and 1.4 points from an increase in the market's price-earnings multiple.

Current dividend yield is only 1.5% and is not projected to go much higher- at least as far as I am concerned. Many companies have been plowing back money into the firm leaving very little for distributions.

Stocks down: (2003) It was the third consecutive annual decline, the first time that has happened in 60 years.

the Wilshire 5000, the broadest market index, has dropped 43 percent from March 2000, leaving investors $7.4 trillion poorer — a potential loss in wealth of $26,000 for every American.

This year, the Wilshire dropped 22.1 percent; the S.& P. 500 index dropped 23.4 percent; the Dow Jones industrial average finished down 16.8 percent, and the Nasdaq composite index — most punished among the major gauges — fell by 31.5 percent.

Index                          2002 close       2002 % change     2001 % change      2000 % change

Dow industrials           8341.63           -16.8%                -7.2%                    -6.2%

S&P 500                    879.82              -23.4%                -13.0%                  -10.1%

Nasdaq composite     1335.51            -31.5%                -21.1%                   -39.3%

Source: USATODAY.com research

Wall Street wrapped up its first three-year losing streak since the period between 1939 and 1941, capped by the worst December performance by the blue-chip Dow since 1931.

· All sectors in the S&P 500 index were down this year, the first time that has occurred since at least 1981, when S&P began tracking such data, the company said. Not one issue doubled in price this year, which has not occurred since 1990. It has declined almost 42% from its all-time high of 1527.46 on March 24, 2000.

· All sectors in the S&P 500 index were down this year, the first time that has occurred since at least 1981, when S&P began tracking such data, the company said. Not one issue doubled in price this year, which has not occurred since 1990

Returns (2003) From the beginning of 1965 through the end of 2002 (you will soon learn why this period was chosen), the per share book value of the S&P 500 Index increased in 27 of those 38 years—or 71% of the time. More significantly, the average annual gain for the period was 10%, with an overall compounded gain of 3,663%. The largest loss of 26.4% was experienced in 1974; the second most significant loss of 22.1% occurred in 2002. Not surprisingly, the best period of gains occurred starting in 1995 through 1999, averaging a 26.7% increase. During the bull market of 1982 through 1999, the average gain for the S&P 500 Index was an astounding 19.0%. Most investors would be delighted if this kind of performance could be sustained. The problem with index performance averages is academic studies have shown that few investors do as well as, much less beat, the major indexes.

For each of the past three years the book value of the S&P 500 Index (with dividends included) declined 9.1%, 11.9%, and 22.1% respectively.

Returns: (Dalbar 2003) stock-fund investors held their fund shares for a little less than 30 months from 1984 through 2002, on average. Along the way, they earned an average 2.6% annualized gain, compared with 12.2% for the Standard & Poor's 500-stock index.

Bond-fund investors tended to be more patient, holding on for more than 34 months on average and earning a 4.2% annualized return. While that tops the average stock-fund shareholder, it trailed the 5.5% annualized gain for Treasury bills.

The study's findings in previous years, including those before the start of the latest bear market, also showed investor futility in trying to time the market. For example, stock-fund investors posted an annualized return of 7.2% between 1984 and 1999, compared with an 18% average annual return for the S&P 500.

Investor returns: A 2003 Dalbar study show that investors made less than inflation over the last 19 years. The average equity investor earned just 2.57% annually compared to inflation of 3.14% and the 12.22% the S&P 500 index earned annually from January 1984 through December 2002.

Terrible returns: (2003) Dalbar reports that over the last 19 years, the average equity investor earned just 2.57% annually because they were going in and out of the market at the wrong times. Those in bonds did slightly better annually at 4.24%. The S&P 500 did 12.22% annually during that period and the long term government bond index had done 11.2%.

When you look at statistics below, 44 million Americans are functionally illiterate. The next 44 million may be literate- but still don't have a clue to investing. What about the next 44 million? Not too much better. They can read, they are (supposedly) educated. Unfortunately, they think they know everything and don't read. So put all of this together and you can understand a 2.57% return over 19 years.

Up up and away: (2003) It took the DOW 76 years to reach 1,000. That was in 1972. Another 14 years before it hit 2,000 in 1987. The 3,000 mark was hit  four years later in the spring of 1991. In February 1995, it was 4,000. But before the year was out , it hit 5,000- and that was just in 9 months. Then look what happened.

Per Taleb, "Financial pundits who scan the market history think they have found a correlation between stock market dips and changing hemlines or stock market booms and presidential elections when they are simply imposing perceived casual relationships on the randomness of reality.

Consumers expect the world to be linear and regular and that is why we are caught off guard by those events that break with the traditions of the past- or what we thought were the patterns of the past. For example, we have been told repeatedly that on average over a 10 year period that the stock market returns about 10%. But what of those two periods when the market produced on ly 2% after inflation. How does an investor calculate the odds that at some point the market might average less than 2% over 20 years- or that he might find himself stuck in just such a dry spell."

My comments- There is a fallacy in the above premise that a person actually is an investor. Simply because someone puts money into the market does not make that person an investor per se- simply an entity that has almost universally relied on non existent homework (reading and research). That said, what are they going to read? Someone looking for assistance tends to get Money, Kiplinger's, Wroth et al in the supposed belief that a journalist (with the financial IQ of a Kumquat) is going to lead them to the golden path to wealth. It has been my experience that few have a clue and that was further borne out in a conversation with Bill Jahnke most recently.

Look at my comment regarding Johnathan Clements of the WSJ who told readers that the total payout on a life annuity was taxable yield. That defies credulity. Or Morningstar- with millions of dollars of research- suggesting you use unlicensed advisers. The past president of the SEC who doesn't know what true diversification is. Therein lies the real the problem. People that don't read are out to lunch. Those that do make some effort are only going to be victimized by a journalistic medium that is highly suspect in both its knowledge and its fiduciary duty.  And a government that doesn't even know the fundamentals.

And they are now advertising: (Van Hedge Fund Advisors)  the number of hedge funds has almost doubled since 1993, to 4,600 last year. The worldwide total is about 7,500, with $650 billion in assets last year. They typically require a minimum investment of $1 million, are mostly open only to large institutions, like endowments, pension plans and investment companies with at least $5 million in assets, or to individual investors with a net worth of at least $1.5 million or yearly income of at least $200,000 over two years.

Performance: (2004) Yale Hirsch has shown that the months of October through January are the best performing months of the year in the stock market, that the market performs better around the first of the month than the middle of the month, that the market tends to rally around holidays, and so forth. Some patterns change over time. Monday used to be the worst day in the stock market, but recently it has become the best performing day.

Hot returns- (2004) Mark Hulbert has tracked what would have happened if every year an investor put his or her money into the prior year’s top performing newsletter.

The results aren’t pretty. Over the past 21 years, the result would have been an annualized loss of 31.4 percent a year. In the real world, that’s equivalent to investing $10,000 in January 1981 and finding that all you have left at the end of 2002 is $2.32.

Hulbert also looked back 15 years, to the start of 1988, and identified the 10 most successful newsletters since then through 2002. Their average annualized return was 14.3 percent.

Unfortunately, your chances of picking those 10 newsletters, out of all those that Hulbert tracked, would have been close to zero.

Many people “shop” for guidance by attending investor conferences. Paul Merriman has spoken at national and regional investment conferences for many years, and he’s heard presentations from quite a few popular speakers. I asked him for some names, then we looked up their 15-year track records as reported by Hulbert. The following annualized returns, which cover the period 1988 through 2002, suggest that it takes more than a great speaker to make a successful newsletter portfolio.

John Dessauer, Investor’s World: 7.9 percent.

James Dines, The Dines Letter: 1.3 percent.

Joe Granville, The Granville Market Letter: -11.9 percent.

Michael Murphy, California Technology Stock Letter: -7.4 percent.

Louis Navalier, MPT Review: 15.3 percent.

Howard Ruff, The Ruff Times: 2.7 percent.

Bernie Schaeffer’s Option Advisor: -5.4 percent.

Harry Schultz, International Harry Schultz Letter: 4.3 percent.

Jim Stack, Investech: 4.5 percent.

Every one of these editors is an entertaining, persuasive speaker who inspires confidence before an audience. But among these nine, only Louis Navalier beat the Dow Jones Industrial Average, which was up 14.1 percent in this 15-year period. None of the other eight came even close to matching the performance of the Standard & Poor's 500 Index (up 11.4 percent). And seven of the nine couldn’t even match the 5 percent annualized return of Treasury bills.

Chasing performance doesn’t work.

Multiple assets from Roger Gibson:

Roger Gibson allocation 1999

: Roger Gibson 1999

Value stocks: (Russel Wild 2004) Historically, they have (supposedly) provided a greater return along with a greater risk. I say supposedly since it depends who does the numbers and the definition of even what value means. Anyway, assuming there was a positive correlation, it may not exist for much longer.

Most analysts give three potential explanations for value's outperformance. First: The value premium is a reward for higher risk. Second: It's the result of irrational exuberance. Third: It's just a fluke of history, nothing more, nothing less. Let's examine these in turn.

French, finance professor at Dartmouth isn't sure how things will shake out. "It is possible that part of the value premium has been the result of mispricing, and perhaps part of that mispricing will be corrected in the future," he says.

Russ Kinnel, director of mutual fund research at Chicago-based Morningstar, agrees that some correction seems likely. "The markets have changed. The Internet is allowing for a greater flow of information. The financial industry is more sophisticated. The markets are becoming more efficient." Therefore, he suggests the value premium will probably be less sweet in the future.

Indeed, some argue the value premium is already a relic. Ludovic Phalippou, a finance professor , recently studied the value premium and came to the conclusion that it is "a small, concentrated, and dying phenomenon." He holds that the only true value premium that still exists is found in the world of very small, thinly traded stocks, which tend to be ignored by institutional investors.

Well, that sucks: (NY Times 2004) Historically, September is the worst month for the Dow Jones industrial average, with an average decline of 1.57 percent from 1928 through 2003. It is also the worst month for the Standard & Poor's 500-stock index, with an average decline of 1.28 percent, according to S.& P. October, meanwhile, is the fourth-worst month for the Dow and the fifth-worst for the S.& P.

BUT in presidential election years since 1928, the market has done better in these two months. In September of those years, the Dow and S.& P. have declined less than one-quarter of 1 percent, on average. In election-year Octobers, they have risen - by less than a percentage point, to be sure, but by more than they have in an average October.

If history is any guide, the Dow could have an additional lift in November and December, though the benefits for the S.& P. 500 tail off a bit at the end of the year.

Downtime: (Ned Davis Research 2004) The stock market decline, which lasted 183 calendar days, was the second-longest price "correction" in a bull market since 1900. The only other decline in a bull market that dragged on longer dates to 1947-48, when stocks went south for 236 days. The median correction is 37 days.

Analysts blame the market's troubles on the fact stocks had such a good year in 2003, when the S&P 500 gained 26%. All the positives heading into this year, such as strong earnings, were already baked into prices. (That is a standard rationalization.) As the year progressed, stocks faced more head wind: record oil prices, a weak job market, a slowing economy, political uncertainty and fears of terrorism. That increased risks, hurting prices.

How now market: Over the 19¾ years through mid-1949, the S&P 500 climbed just 1.5% a year, slightly behind the 1.6% annual inflation rate. The 16½ years through mid-1982 were even worse. In that stretch, the S&P 500 clocked a mere 5.1% a year, well behind the 7% inflation rate.

Returns: (2005) over the past 100 years American shares have outperformed bonds, property, art and gold, with an annual average total return of 9.7%, or 6.3% after inflation. Government bonds returned less than 5%.

An investor buying American shares in 1964 and selling in 1974 would have made a real loss of 35%.

periods of exceptionally high returns—such as the 1980s and 1990s—are usually followed by phases of exceptionally poor performance. The 20-year bull markets in shares (which lasted until 2000) and in bonds (which continued into 2004) were fuelled by an almost continuous fall in inflation and hence interest rates. But now that inflation is low, neither shares nor bonds are likely to deliver double-digit returns.

Interest rates have now adjusted to low inflation, and bond yields are near historic lows, so potential capital gains are limited unless deflation emerges. That implies bond returns in most countries will be broadly in line with their current yield of less than 5%.

nominal return on American shares over the next decade will average 6.8% (5% profits growth, plus dividends), half the figure for the past 20 years. If profit margins fall modestly and the p/e ratio reverts to its long-term average, returns will average 4.9%—well below investors' expectations. Surveys suggest that individuals expect returns of more than 10%.

Investing in emerging stockmarkets could also pay off handsomely over the next decade. The average p/e ratio in emerging markets, based on future expected profits, is around ten, not much more than half of Wall Street's. To be sure, they are a risky bet: although in 18 of the past 20 years one of these markets has topped the global investment league, the same market has often collapsed the next year. Over the past 20 years, emerging markets as a group have underperformed Wall Street, with an average total return of 10.9%.

Returns: (2005) We find that within the group of investors who hold relatively better diversified portfolios (portfolios with 7 or more stocks), about 28% of portfolios are above the Capital Market Line. In contrast, only 17% of portfolios with 1-3 stocks (i.e., concentrated portfolios) are above the CML. These results are obtained for one time period (September 1995) but results are very similar in other months. This evidence indicates that investors hold inefficient portfolios where the degree of inefficiency is greater among less diversified portfolios. Consequently, the economic costs of under-diversification are likely to be higher for investors who are under-diversified.

The standard deviation of the mean monthly excess portfolio return measure is 1.74 for investors with the least diversified portfolios (decile 1) but only 0.80 for investors with the most diversified portfolios (decile 10). The 10th and the 90th percentile measures provide additional evidence of extreme performance in the less diversified investor groups. In addition, we find that in deciles 1-5, more than a quarter of investors have negative Sharpe Ratios. These investors earn lower return than even the riskfree rate while taking considerable risks.

Collectively, these results indicate that, on average, higher levels of diversification lead to higher risk-adjusted performance.

Our results indicate that he majority of investors in our sample are under-diversified and the extent of under-diversification is more severe in retirement accounts. Even accounting for the likelihood we have selected a group of speculators, the magnitude of the idiosyncratic risk taken by investors in our sample is surprising. Over time, the degree of diversification among investor portfolios has improved but these improvements result primarily from changes in the correlation structure of the U.S. equity market.

Examining the determinants of portfolio diversification, we find that investors’ personal characteristics, their stock preferences, and their behavioral biases jointly influence their diversification choices. Younger, lower-income (less wealthy), and relatively less sophisticated investors and those who follow price trends, prefer local (familiar) stocks, and exhibit overconfidence hold relatively less diversified portfolios. The degree of diversification also varies across occupation categories in a manner which further supports the view that investors’ diversification decisions depend upon age, income and their level of financial sophistication. Under-diversified investors exhibit strong style and industry preferences and they also prefer more volatile and positively skewed stocks. Furthermore, we find some evidence to support the asymmetric information hypothesis for under-diversification – under-diversified, active investors out-perform better diversified, active investors. In contrast, we find that factors such as small portfolio size, transaction costs, and search costs are unlikely determinants of investors’ diversification choices.

The unexpectedly high idiosyncratic risk in investor portfolios results in a welfare loss as measured by the Sharpe ratio of individual portfolios. This evidence in itself is not surprising. Our surprising finding is the evidence of better stock-selection abilities among diversified investors. The least diversified (lowest decile) group of investors earn 2.40% lower return annually (the four-factor alpha differential is 0.20% per month) than the most diversified group (highest decile) of investors on a risk-adjusted basis. This evidence is consistent with our evidence of lower under-diversification among relatively more sophisticated and more resourceful investors. Even more surprising is our finding that within the group of active investors (investors with portfolio turnover in the highest decile), the least diversified category of investors out-perform those in the highest diversification quintile. This suggests that a small, active group of investors may have some investment skill.

International vs. U.S. Volatility

Note how articles can point to an average rate from the 1900's. But I was not alive then so who cares? It's what is going on in your current existence and the volatility has changed remarkably from the mid 80's. The economy changes everything and you have to work within those adjustments.

Returns: (2005) Stocks, as measured by the Standard & Poor's 500-stock index, have averaged a 10.4% annual return from 1926 through June 2005, according to Ibbotson Associates, the Chicago research firm. That's assuming you reinvest dividends.

The S&P 500 has averaged a 2.4% average annual loss the past five years, and a 9.9% gain the past 10 years.

Stocks vs. Home Prices (2005)

                           Average Annual Change

                         2000-2005           1980-2005

S&P 500            -2.7%                 +10.2%

Housing Prices

New York        +12.0%                 +7.7%

Los Angeles       +15.5%                +6.7%

Chicago               +7.7%               +5.5%

2006

Pay real close attention to this.  (2006) The same thing happened in 1973/74. In the 90's no one would pay attention when I taught how to reduce the exposure. That's why trillions of dollars were lost needlessly. (The initial funds are $500,000).

Very interesting statistics: (2006) S&P Mutual Fund Performance Persistence Scorecard  At December 31, 2005, only 15.5% of large-cap funds, 10.2% of mid-cap funds, and 9.8% of small-cap funds maintained a top-quartile ranking over three consecutive 12-month periods. Three-year top-half performers totaled 32.2% of large-cap, 27.3% of mid-cap, and 25.7% of small-cap funds (285 funds). For five consecutive years, top-half consistency percentages were smaller at 11.7%, 10.6%, and 12.0% for large-cap, mid-cap, and small-cap funds (108 funds).

Our research indicates that top-quartile and top-half persistence over three years tends to remain higher than random expectations. Over five years, while large- and small-cap funds continue to exceed random expectations, we see deterioration in top quartile results for madcap funds. Overall, it is difficult to maintain a top-quartile ranking over a long time period. Some mid-cap funds, which can hold a portion of the portfolio in large-capitalization securities, can be hurt by their weightings in a capitalization space that is out of favor.

Over the past five years, close to a market cycle, the majority of consistent top-half performers continued to favor the value style. Over the past three years we see higher percentages in the growth styles. Finding top-performing small-cap funds that are still open to new investors remains difficult; over a quarter of consistent small-cap funds are closed.

Five-year consistent performers had longer manager tenure at their funds, lower expenses relative to peers and minimized or avoided losses during the bear market relative to peers. Interestingly, over a three-year period, average expenses for large-cap consistent performers exceeded the universe average. Growth funds tend to have, on average, higher expenses relative to value funds. As the number of consistent top-performing growth-style funds increase, expenses may drift higher relative to the universe average.

Transition matrices provide information on longer-term performance persistence. There was some persistence over a one-year time frame but persistence declined over longer time horizons. If there were no persistence, we would expect to see 25% repeating top-quartile performance and 50% repeating top-half rankings in the second period. Transition matrices over a one-year time horizon show an average of 34.5% remaining in the top quartile and 53.5% maintaining their top-half ranking. Over longer periods, the average top-quartile (tophalf) repeat performances were 28.4% (44.4%) for three years and 7.41% (26.1%) for five years.

Fourth quartile funds had a higher probability of disappearing. The three-year transition matrix notes that 26.5% of large-cap, 26.5% of mid-cap, and 29.6% of small-cap 4th quartile funds disappeared due to mergers or liquidations. A large percentage of 4th quartile funds that survived still remained in the bottom half (38.7% of large-cap, 29.4% of mid-cap, and 38.0% of small-cap).

Returns: (2006) missing the ten best days out of the 5050 possible reduces the return from11.83% to 9.00%, reducing return by almost twenty-four percent. At the same time, the associated risk drops by less than three percent. Should the investor miss out on the 50 best trading days of the period (only 1% of the data set) returns drop to a meager 2.43%, representing almost an eighty percent loss of return, while risk is reduced by only six percent. It would appear that market timing could be hazardous to one’s return. However, if market timing means missing the best trading days of the period, then missing the worst days must be possible as well. The question then becomes, “How will returns be affected if the investor misses the worst trading days of the period?”

It is apparent from the results that the worst days of the period, although 298 fewer in number were somewhat more severe than the best days. By simply missing the ten worst days the return jumps from 11.83% to 16.41%, almost a thirty-nine percent increase! By missing the worst fifty days of the period the return is up to 24.04%, or over one hundred percent!

Returns:  (2006) During the past 15 years, the average pretax return of the total U.S. stock market was 17.2% per year. The index fund would have provided an annual rate of aftertax return of 16.1% to the investor, compared with just 11.8% per year for the active fund.

A Fresh Look at Investment Performance Evaluation: Unifying Best Practices to Improve Timeliness and Reliability 2006

It's time for a fresh look, a new perspective, on investment performance evaluation because performance evaluation is still conducted in much the same way today as it was 30 years ago. While peer groups and indexes have painted fuzzy evaluative pictures, a modern-day application of classical statistics unifies these two approaches to better differentiate success from failure. Portfolio simulations create a framework for comparing what actually happened to what could have happened, providing fair and accurate evaluations.

Risk and Reward  2006

5-Year T-Note Portfolio 10% Equity Portfolio 20% Equity Portfolio 30% Equity Portfolio 40% Equity Portfolio 50% Equity Portfolio 60% Equity Portfolio 70% Equity Portfolio 80% Equity Portfolio 90% Equity Portfolio S&P 500 Index W/Divs

1973 4.6 2.6 0.6 -1.3 -3.3 -5.2 -7.1 -9.0 -10.9 -12.8 -14.7

1974 5.7 2.2 -1.2 -4.6 -7.9 -11.1 -14.3 -17.4 -20.5 -23.5 -26.5

1975 7.8 10.6 13.4 16.3 19.2 22.1 25.1 28.1 31.1 34.1 37.2

1976 12.9 14.0 15.2 16.3 17.4 18.5 19.6 20.7 21.8 22.8 23.8

1977 1.4 0.5 -0.3 -1.2 -2.1 -2.9 -3.8 -4.6 -5.5 -6.3 -7.2

1978 3.5 3.9 4.3 4.6 5.0 5.3 5.6 5.9 6.1 6.4 6.6

1979 4.1 5.5 6.9 8.3 9.8 11.2 12.6 14.1 15.5 17.0 18.4

1980 3.9 6.7 9.5 12.4 15.2 18.1 20.9 23.8 26.7 29.5 32.4

1981 9.4 8.0 6.5 5.1 3.6 2.2 0.7 -0.7 -2.1 -3.5 -4.9

1982 29.1 28.4 27.7 27.0 26.3 25.5 24.8 24.0 23.1 22.3 21.4

1983 7.4 8.9 10.3 11.8 13.3 14.8 16.3 17.9 19.4 21.0 22.5

1984 14.0 13.3 12.6 11.8 11.1 10.3 9.5 8.7 7.9 7.1 6.3

1985 20.3 21.5 22.7 23.9 25.1 26.3 27.5 28.7 29.8 31.0 32.2

1986 15.1 15.6 16.0 16.4 16.8 17.1 17.5 17.8 18.0 18.3 18.5

1987 2.9 3.6 4.2 4.7 5.2 5.5 5.7 5.7 5.7 5.5 5.2

1988 6.1 7.1 8.2 9.3 10.3 11.4 12.5 13.5 14.6 15.7 16.8

1989 13.3 15.1 16.8 18.6 20.5 22.3 24.1 25.9 27.8 29.6 31.5

1990 9.7 8.5 7.2 6.0 4.7 3.4 2.1 0.8 -0.5 -1.8 -3.2

1991 15.3 16.9 18.4 20.0 21.5 23.0 24.5 26.1 27.6 29.1 30.5

1992 7.2 7.3 7.3 7.4 7.5 7.5 7.6 7.6 7.6 7.7 7.7

1993 11.2 11.1 11.0 10.9 10.8 10.7 10.5 10.4 10.3 10.1 10.0

1994 -5.1 -4.5 -3.8 -3.2 -2.5 -1.9 -1.3 -0.6 0.0 0.7 1.3

1995 16.1 18.1 20.1 22.2 24.3 26.4 28.5 30.7 32.9 35.2 37.4

1996 2.1 4.1 6.1 8.1 10.2 12.2 14.3 16.5 18.6 20.8 23.0

1997 8.4 10.7 13.1 15.6 18.0 20.5 23.0 25.5 28.0 30.6 33.2

1998 10.2 12.2 14.2 16.1 18.0 19.9 21.7 23.5 25.2 26.9 28.6

1999 -1.8 0.4 2.6 4.8 7.0 9.3 11.6 13.9 16.2 18.6 21.0

2000 12.6 10.3 8.1 5.9 3.7 1.5 -0.7 -2.8 -4.9 -7.0 -9.1

2001 7.6 5.7 3.8 1.9 -0.0 -2.0 -4.0 -5.9 -7.9 -9.9 -11.9

2002 13.0 9.2 5.5 1.8 -1.8 -5.3 -8.8 -12.2 -15.6 -18.9 -22.1

Annual Return 8.7 9.0 9.3 9.6 9.8 10.0 10.2 10.4 10.5 10.6 10.7

Std. Deviation 6.3 6.3 6.6 7.4 8.5 9.8 11.3 12.8 14.5 16.1 17.9

Worst Month -6.4 -5.7 -5.1 -5.2 -6.8 -9.3 -11.7 -14.2 -16.6 -19.1 -21.5

Worst 3 Months -6.9 -6.0 -6.0 -7.7 -11.0 -14.2 -17.3 -20.5 -23.5 -26.6 -29.5

Worst 12 Months -5.5 -4.7 -7.7 -12.2 -16.5 -20.6 -24.6 -28.4 -32.0 -35.6 -38.9

Worst 36 Months 2.3 5.2 7.1 9.1 1.8 -5.8 -13.0 -19.8 -26.1 -32.1 -37.6

Worst 60 Months 16.3 20.2 23.0 24.4 20.2 15.9 11.6 7.3 3.1 -2.3 -7.9

Returns (Mercer Investment Consulting, Inc. 2006) the average corporate fund returns for 249 plans fell 1.1%, compared with a 4.5% gain in the first quarter; for the 59 public funds there were negative returns of 0.9%, versus a 5% first quarter return, while average returns of 142 foundation/endowment funds also fell 0.9%, compared with the 5.1% gains in the first quarter of the year. For Q2, foundation/endowment plans lead with an average gain of 11.4%, followed closely by public plans' 11.3% gains, while corporate plans registered an average return of 9.6%.

Returns- $1 invested in the S&P 500 in 1926 would have grown to $1,114 by 2005. However, if the same dollar was invested but the investor got out of the stock market during the 35 best months of the period (a total of 840 months), the dollar would have grown only to $10. Expressed differently, 99% of the growth during that period occurred during only 4% of the months in it.

30 year return-  (2007) Richard Ferri, CFA, has prepared a 30-year market forecast. He arrived at his estimated return figured by analyzing a number of economic and market risk factors, including Federal Reserve forecasts, inflation forecasts derived from inflation-protected securities, and the volatility of asset classes, styles, and categories.

Estimated Returns

Asset Class...........................Estimated.................Less Estimated......Equals Estimated

and Category.......................Total Return.............Inflation....................Real Return

T-Bills..................................3.0%%                  3% 0.5%

Intermediate T-Notes.........4.5%                       3% 1.5%

Intermediate Hi-Grade

Corporate Bonds................5.0%                       3% 2.5%

U.S. L-Cap Stocks..............8.0%                    3% 5.0%

U.S. S-Cap Stocks..............9.0%                    3% 6.0%

U.S. S-Cap Value Stocks..10.0%                   3% 7.0%

REITs....................................8.0%                  3% 5.0%

International Developed

Country Stocks......................8.0%                   3% 5.0%

You can use these estimated total return figures to apply each percentage to the proportion that it represents in your portfolio.

Here's an example of how you would calculate the expected return on a portfolio that contained

30% U.S. L-Cap stocks x 8% = 2.4%

10% U.S. S-Cap stocks x 10% = 1.0

20% International Developed country stocks x 8% = 1.6%

10% REITs x 8% = 0.8%

30% Intermediate high Grade Corps x 5% = 1.5%

In this example, the portfolio's total expected return would be 7.3%

(2.4% + 1.0% + 1.6% + 0.8% + 1.5%) = 7.3%

More often than not,no particular asset class outperformed all the others for more than one or two years.

Leveraged:? (2007) A good example of a mutual fund that uses leverage is the Rydex Nova Fund. The fund, from the Rydex family of mutual funds, is a no-load fund designed to provide investment returns that correspond to 150 percent of the performance of the S&P 500 Index. The fund uses borrowed funds (margin) to increase its exposure to the Index to 150%of the assets invested in the fund. The fund achieves its target beta (exposure to the price change in the Index) of 1.5, through the purchase of shares of individual securities, stock index futures contracts, and options on securities and stock indexes. The question for investors is: Does the fund deliver on its premise?

The Rydex Nova fund began its life in 1994. For the nine-year period 1994-2002 the S&P 500 Index provided an annualized return of 9.26%.If the Nova fund were able to deliver 150% of the returns of its benchmark index it would have provided investors with an annualized return of 13.89%. Instead of returning 150%, Rydex Nova earned just 46.9% of its goal, and a shocking 30% less than the S&P 500 Index itself. Not only did investors in Rydex Nova earn 30% lower returns, the use of leverage caused the standard deviation of the fund to be 31.56% vs. just 22% for the S&P 500 Index. Thus the fund returned 30% less while taking investors for a ride that was 43.5%more volatile.The following table shows the results of the last four calendar years, 1999-2002. The term alpha in the table compares the returns realized by investors in the fund against the targeted benchmark of 150% of the performance of the S&P 500 Index. A negative alpha would indicate a shortfall.

1999 (%)2000 (%)2001 (%)2002 (%)

Rydex Nova (A) 24.0 -19.6 -22.2 -35.1

S&P 500 Index (B)21.0 -9.1 -11.9 -22.1

150%S&P 500 (C) 31.5 -13.7 -17.9 -33.2

Alpha (A-C) -7.5 -5.9 -4.3 -1.9

Let's look at the various factors that contributed to the dramatic shortfall.

The first factor is that the fund carries a high expense ratio of 1.16%. This is about 1% more than that of the lowest cost alternatives such as an ETF or an index fund. Greater expenses lead to lower net returns.The second factor is that margin is not free. When you borrow money to increase your exposure to the market, you have to pay the lender a spread over its cost of capital. The borrowing costs add to the hurdle of operating expenses, further reducing the net returns available to investors. If options were used to increase exposure, then the option premium must be paid, again negatively impacting returns.

The third factor is that volatility creates a sort of black magic we might call decompounding. The greater the volatility, the larger the difference there will be between the average annual return of an investment and its compound, or annualized, rate of return. Let's now look at the impact of volatility on the returns of the S&P 500 Index and the Rydex Nova Fund. The annual return of the S&P 500 Index was 11.3% percent. Volatility of 22% per annum reduced the annual return to an annualized return realized by investors of 9.26%. Realized returns were 81.9% of the annual return-volatility destroyed 18.1% of returns. The annual return of the Rydex Nova Fund was 10.83% percent (note that even the annual return of this fund was lower than the annual return of the S&P 500 Index). Volatility of 31.56% per annum reduced the annual return to a return realized by investors of 6.52%. Realized returns were just 60.2% of the annual return-volatility destroyed almost 40% of returns.

CAPM over time (2007)

The only problem with this type of study is that all graphs can look pretty good when smoothed over a long period of time- in this case 36 years. It also reflects that there was enough money for retirement to begin and one did not need the returns of the market.

CAPM and risk (2007)

Morningstar "STARS" justified?  (2007) The importance of Morningstar’s star ratings is highlighted by the fact that the bulk of investors have little knowledge about the funds that they are investing in and historical performance is the leading source of information for mutual fund investors (Capon, Fitzsimons and Prince; 1996). This put a great weight on Morningstar’s rating system when investors decide upon which fund to invest in. Nevertheless, whether this great weight is justified is under scrutiny in this paper.

Results indicate that the rating system in effect up to October 1996 is good at predicting severe underperformance, but fails to discriminate between three, four and five star rated funds. The predictive performance of this system is similar to the predictive performance of the system where the ratings are based on four broad asset classes. However, in terms of predictive performance, the rating system is at best equal to a random walk.

* For the U.S. Stock category, the rating system employed by Morningstar offers no added value in terms of predicting mutual fund returns, as there is no occasion where the rating system would outperform a random walk. Unlike the system that classifies all mutual funds as a single group, the system using the U.S. Stock classified funds to base a rating upon is even not able to predict underperformance.

The rating system used by Morningstar for International Funds does, at best, equal the performance of a random walk. However, it s not able at outperforming this random walk.

Conclusion

The analysis on predictive performance shows that while both the rating system based on categories and the rating system based on four broad asset classes fail to outperform a random walk, this does not hold for one large sample of mutual funds as seen in table 6. This table shows that a rating system using just one category is perfectly able at distinguishing poor performance from superior performance. However, this system cannot properly discern three and four star rated funds from five star rated funds.

The comparison between the two latest Morningstar rating system methodologies concludes that the old Morningstar Mutual Fund rating system is, in terms of predictive performance, superior to the new rating system. Even after analysing potential biases in the analysis, the conclusion holds. This implies that the results found by Morningstar (Kinnel, 2005) are largely incorrect. The only advantage of the new rating system is that it shows in which exact categories it is able to predict performance. It is for those, and only those categories that the new rating system should be used as a source to base the investment decision upon. For all other categories, the Morningstar’s rating system does not offer any value in terms of predicting future performance and is degraded to an excellent source of information about a specific fund (fund manger, top five holdings etc.)

The results of these analyses in this paper indicate that Morningstar is an excellent source for obtaining information on mutual funds as they offer very detailed information on a wide array of funds. However, the results of their rating system prove that, once more, past performance does not guarantee future results.

Commodity prices-  (2007) The United States no longer drives commodity demand, Asia does!”. The U. S. is not the engine it once was, and now represents only 30% of demand for base commodities like copper and aluminum.

Standard & Poor’s Global Stock Market Review

The Performance of International Equity Portfolios

Standard & Poor's Indices Versus Active Funds, Scorecard, Second Quarter 2006- Tons of charts and figures

The Performance of International Equity Portfolios (Charles P. Thomas 2007) This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While U.S. investors did abstain from momentum trading and instead sold past winners, we find no evidence that these past winners subsequently underperformed. In addition, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. In contrast, we offer strong evidence of longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance in the recent period.

The Performance of International Equity Portfolios  This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While U.S. investors did abstain from momentum trading and instead sold past winners, we find no evidence that these past winners subsequently underperformed. In addition, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. In contrast, we offer strong evidence of longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance in the recent period.

Alternative investments:  

Past present and future: (2007) Morningstar nine style box, 10-year annualized returns. Then and Now.:

On 6-30-00 Large-Cap Growth Funds had the HIGHEST return (17.85%); Small-Cap Value funds had the LOWEST return (11.80%).

On 12-31-06 Large-Cap Growth Funds had the WORST return (6.26%); Small-Cap Value Funds had the BEST return (13.52%). Exactly the reverse.

On 12-31-98 U.S. Growth had the BEST return of all Vanguard funds. On 12-31-2005 it had the WORST 5-year return..

In 1991 and 1992 Gold was the WORST Vanguard fund. In 1993 it was the BEST Vanguard Fund. In 1997 (now "Precious Metals") it was the WORST fund.

In 1991 Energy was the WORST Vanguard fund. In 2005 Energy had the BEST 10-year Return.

In 1994 Pacific Index was Vanguard's BEST fund. In 1996 Pacific Index was Vanguard's WORST fund.

In 1994 Total Bond Market had its WORST return (-2.7%). In 1995 TBM had its BEST return (+18.2%).

In 1999 Emerging Markets was Vanguard's 2nd BEST fund.

In 2000 Emerging Markets was Vanguard's WORST fund.

In 1998 REIT was Vanguard's 3rd WORST fund.

In 2004 REIT was Vanguard's 3rd BEST fund.

In 1998 L.T. Treasury was Vanguard's WORST fund.

In 2002 L.T. Treasury was Vanguard's 2nd BEST fund.

In 2002 Life-Strategy Income had the BEST 5-year return of all L.S. funds. L.S. Growth had the WORST.

In 2006 Life-Strategy Income had the WORST 5-year return. L.S. Growth had the BEST.

Morningstar Star Rating System is objectively based on past performance (risk and return). This is a portion of the Abstract (conclusion) from a recent study about past performance and the Star Rating System:

"This study investigates in a thorough empirical analysis the predictive performance of mutual fund ratings given by Morningstar over the course of a 10-year period beginning March 1995. From this analysis it becomes clear that the predictive performances of the different rating systems used by Morningsar do not beat a random walk."

DOW JONES RELATIVE RISK INDEXES LINK 

Performance as of 07/13/2007

Relative Risk Index Yesterday MTD Previous Calendar Month YTD 1 Year

DJ Conservative Portfolio Index 0.11% 0.61% -0.16% 2.89% 7.54%

DJ Moderately Conservative Portfolio Index 0.24% 1.41% -0.50% 4.78% 11.87%

DJ Moderate Portfolio Index 0.36% 2.23% -0.57% 8.22% 19.11%

DJ Moderately Aggressive Portfolio Index 0.46% 2.96% -0.63% 11.23% 25.43%

DJ Aggressive Portfolio Index 0.56% 3.67% -0.72% 14.00% 31.55%

Index Percent of Equity Risk Similar Balanced Inv. Names

DJ Conservative Portfolio Index 20% Income

DJ Moderately Conservative Portfolio Index 40% Income with Growth

DJ Moderate Portfolio Index 60% Growth with Income

DJ Moderately Aggressive Portfolio Index 80% Moderate Growth

DJ Aggressive Portfolio Index 100% (All Stocks Portfolio) Aggressive Growth

S&P 500 10 year rolling returns starting 1970. Returns include dividends

1970- 1979 5.9%`

1971-1980 8.5

1972- 1981 6.5

1973- 1982 6.7

1974- 1983 10.7

1975- 1984 14.8

1976- 1985 14.3

1977- 1986 13.9

1978- 1987 15.3

1979- 1988 16.3

1980- 1989 17.5

1981- 1990 13.9

1982- 1991 17.6

1983- 1992 16.2

1984- 1993 14.9

1985- 1994 14.4

1986- 1995 14.9

1987- 1996 15.3

1988- 1997 18.0

1989- 1998 19.2

1990- 2001 18.2

1991- 2002 17.4

1992- 2003 12.9

1993- 2004 9.3

1994-2005 11.1

1995- 2006 12.1

1996- 2005 9.1

1997 8.4

Returns  (2007)

Distribution; (Buffet 2007) An attendee from Hong Kong asked Buffett and Munger to address the topics of decreasing risk premiums, increasing correlations across markets, and the proliferation of a short-term mindset in investing.

Buffett: We do think it’s unhealthy. Many people think a portfolio should be evaluated daily. If you take the degree to which either bonds or stocks are owned by people [who] would change their mind tomorrow based on one event, it increases turnover. Bond turnover has increased dramatically. If you are trying to beat the other fellow on a daily basis, you are going to hit the [“enter”] key faster. It’s not new—markets have done crazy things over time. Human beings do things that are entirely irrational, such as in 1987, 1998, and 2002. It’s a different game [in modern times], and there are different consequences than in a buy-and-hold environment. Five to six sigma events don’t mean anything. That’s fine only with coin tossing—not when people are involved. It’s a fool’s game to watch a portfolio daily. In my original partnership, I said, “You’ll hear from me once a year.”

Munger: Bad things in markets are not Gaussian. When people talk about sigmas in terms of disastrous results in markets, they’re all crazy! People who use Gaussian distributions have to believe in the Tooth Fairy to believe that—but it’s easy to teach. I once asked a surgeon why he still did an outdated procedure. “Because it’s so easy to teach!” There’s more of that in (university) finance departments than you’d believe. That stuff has no utility at all, but they keep on teaching it.

Comment: If investors acted randomly, then models of investor behavior based on Gaussian (“normal”) distributions would be valid. However, investors frequently act emotionally and thereby create events that would seem to be highly improbable in a normally-distributed world. (For an interesting discussion of the actual distributions of financial market prices, read Benoit Mandelbrot’s The (Mis)Behavior of Markets, or check out some books on “behavioral finance.”) Munger’s point that the use of unrealistic models is commonplace because most finance professors know and can easily teach them, is a scathing criticism. Outside academia, many financial salespeople incorporate outdated and unrealistic models into their sales pitches, because the math involved—unrealistic as it is—provides an illusion of exactness, and it may bully clients into submission.

Annual Returns of 20 Indexfolios and 16 IFA indexes over 80 yrs