Below are the returns for the major
indices for the year ending December 31, 2007:

Despite the subprime credit meltdown and the U.S. housing recession, the domestic stock market performed relatively well in 2007. Big cap stocks, particularly outside the financials, outperformed mid caps and small caps. Sectors that outperformed in 2007 included energy, health care and technology. International equities performed better than the U.S, particularly in the emerging markets like China, Brazil, India and Russia. Precious metals (gold and silver) also appreciated dramatically in 2007 with returns north of 30%.

Since year end, recession threats have led to a fairly significant selloff in the equity markets. Through February 1, the S&P 500 was down 5.0% and the EAFE index was down 7.9%. It certainly doesn’t look like 2008 will be a great year for equities; probably the best we can hope for is a recovery into modest single digit gains.

What to Do As An Investor?

Priority #1 is to review your asset allocation strategy with your financial advisor. If you are comfortable with your long term asset allocation plan, there is no good reason to make material changes now. We believe, and statistics bear it out, that a buy and hold strategy is more profitable in the long term than attempting to time the markets in and out. Having said that, here are some thoughts to consider with regards to managing your portfolio:

• For 2008, we still favor large cap stocks over small and mid caps.

• Depending on your risk tolerance, we recommend a healthy allocation to international equities. In the near future, international economies will grow at a faster rate than the U.S. A healthy allocation could mean between 20 and 40% of your equities, again depending on your own situation. Warning: If you are well below that kind of allocation, there is no need to rush in. After last year’s runup, it would be wiser to dollar cost average into international over some period of time.

• Regarding fixed income investments, consider diversifying into foreign bonds for both their yield and as a hedge against the falling dollar.

• Consider TIPS as an inflation hedge but be sure to understand the critical differences between Treasury TIPS and corporates.

• Alternative investments should probably represent 10 to 20% of your portfolio of financial assets. Asset classes in this group include hedge funds, managed futures, REITs and commodities. There are unique risks associated with these investments, including liquidity and volatility issues, so consult your advisor to determine those vehicles with which you are comfortable.

Please feel free to contact us if we can help you with your asset allocation strategy.

© 2007 Childs Company