June 16, 2009

Dear Client,

                          Early Summer Update & Portfolio Changes

As we mentioned in our la...
“The New Normal”

Investment professionals face many challenges today. Many of them were expressed succinctly in
a recent ...
In a world of changing and unstable ‘correlations’ (i.e. the relative movement of one
        asset class against another ...
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Client Letter Market Strategy Update 061609


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Client Letter: Portfolio Strategies Update 061609

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Client Letter Market Strategy Update 061609

  1. 1. June 16, 2009 Dear Client, Early Summer Update & Portfolio Changes As we mentioned in our last client letter, we have been very cautious and deliberate over the past several months in our portfolio strategies. That approach has proved beneficial as we avoided the roller coaster-like ride of the stock market. We have created a chart to depict the wild ride of the S&P 500 Index from the beginning of this year through June 16th. As the chart shows, the market has remained virtually flat (see blue line) for the year. Our portfolios, which we designed last year to reflect our lower volatility approach, have been quite successful in meeting our expectations and generating positive returns. 2009: S&P 500 Thru June 16 1000 950 900 850 800 V lu s a e 750 700 650 600 550 500 Period We believe it is now time to make some modifications to our portfolio holdings. Over the remaining months of 2009, we expect that repositioning elements in our “higher risk” bucket will prove beneficial. These changes will only affect clients who have previously approved an allocation to that bucket. As we have communicated to you, our traditional asset allocation approach which utilized various asset classes and which depended on the historic risk/return patterns has transitioned to our two- bucket portfolio strategy – a lower risk bucket, and a higher risk bucket. We base our placement of an investment vehicle into one or the other bucket on our continuing effort to analyze the current level of potential volatility of each investment and its potential return.
  2. 2. “The New Normal” Investment professionals face many challenges today. Many of them were expressed succinctly in a recent PIMCO funds communication. Here are some of the key points that I believe are worth sharing with you. You will, no doubt, recognize that the strategic changes we have already implemented were designed in recognition of these challenges. 1. “The basic approaches investors use to capture superior returns – particularly the trio of the right asset allocation, appropriate investment vehicles, and responsive risk management – are very much in play. Accordingly, and by necessity, investors are facing a bumpy journey to a different destination, which we at PIMCO have called a ‘new normal’. A challenging element of the journey is determining how to best reconcile short-term imperatives that, while valid, also conflict with longer-term realities (emphasis added). The specification of the destination is also difficult, given the ‘resetting’ of variables that were previously deemed parameters – or partial anchors – of market-based systems and behaviors.” This paragraph is a mouthful. Simply put, the rules of the game have changed. More on that below. 2. “…once the immediate waves of dislocation associated with what Bill Gross has labeled DDR (de-leveraging, de-globalization, re-regulation) run their course – investors and policymakers will find themselves in a landscape that only partially resembles that which dominated the 2003-2007 period.” “This is particularly consequential for long-term investors. Accordingly, for all involved, we may well be living in a world where the answers to a few basic questions will determine how best to navigate the bumpy journey and position for the new normal (emphasis added). We may be pressed to question elements of approaches that, over the years, have become conventional wisdom and, in turn, dictated many institutional processes…” We at Silver Oak have been cognizant of this. It continues to support our rationale for moving away from the traditional asset allocation approach which we successfully used during the 2003- 2007 period. Our current more fluid approach to quantifying risk and return into higher and lower risk buckets serves us well at this time. PIMCO also reiterated observations that we have shared with you previously. These included additional complexities in the investment world resulting from a shift from a free-market economy to one with more government controls, the need for governments to finance that growing market involvement, and the potential consequence of these issues altering the role of the U.S. in the global economy. We believe that PIMCO has addressed this point very effectively with this as part of their answer: “In such a world, asset allocations must retain an important element of agility and flexibility. At the minimum, we should expect the ‘special opportunity’ category to become more than just a residual in the periodic assessment of a portfolio.” “Similarly, look for diversification to be seen for what it is in such a world: a highly necessary, but far from sufficient, mitigator of risk (emphasis added).
  3. 3. In a world of changing and unstable ‘correlations’ (i.e. the relative movement of one asset class against another – our explanation), much greater emphasis must be placed on the adaptability of other elements of risk management – particularly the design and implementation of an active program of cost-effective tail risk hedging.” We could not have stated it better – although we hope we can say it more simply. That paragraph summarizes our philosophy of requiring more tactical portfolio approaches which in turn requires new diversification utilizing various hedging techniques to avoid significant and precipitous market declines. We think of these hedging strategies as providing the equivalent of an insurance policy – something you hate to spend money on when it is not used, but certainly a necessary element of risk management. At times, the hedging element we utilize may seem like a drag on portfolio returns when the hedge is not needed. But we feel that the rather small price tag is justified because it helps minimize the loss associated with a calamity. Risk and reward are integral elements of the free-market system that is at the core of our economic system. As governments intervene to modify risk in the system, it will have an effect on returns. PIMCO explains it this way: “We are facing a world of lower growth and accelerated country realignments. It is a reality that also impacts key elements of successful investment management – in particular, asset allocation, manager selection, and risk management. It calls for some critical re-tooling of mindsets (emphasis added). Inevitably, some will resist such a re- tooling. Others will embrace the re-tooling challenge, and in doing so thoughtfully and responsively, they are likely to gain an important first-mover advantage.” We at Silver Oak Wealth Advisors, LLC have taken on that re-tooling challenge. There is certainly a great deal of uncertainty that we are addressing in this new economic landscape. Yet we also believe that there are opportunities. In implementing certain portfolio changes at this time, we believe that we are positioning your portfolios to benefit from those opportunities. Over the course of the next several months, we expect to continue to monitor developments and implement other changes as warranted by the circumstances. We will always communicate with you, and we always invite you to call us with any questions. Sincerely, Joel H. Framson, CPA/PFS, CFP® Eric Bruck, CFP® President Principal