1) Volatility drives returns. The high volatility of 2008 led to large negative returns, but 2009 saw substantial positive returns as volatility decreased. 2) In the first quarter of 2010, most asset classes saw solid gains, with US equity markets continuing strong performance. Over the past year, maintaining a diversified portfolio helped investors benefit from return premiums across different asset classes. 3) Looking back 3 years, only 4 of 15 asset classes had positive returns, with emerging markets and fixed income performing best. However, past performance does not predict future returns, and focusing only on past winners can be misleading.

1. 1ST QUARTER 2010
……………………………… QUARTERLY COMMENTARY
1Q Review Positive market returns of late have caused some investors to forget 2008; yet,
Last 3-Years Review contrarian-minded investors have become even more cautious and skeptical.
We’ll take a moment to address the “Lost Decade,” which several clients have
Last Decade referred to in the last few months; but first is a returns discussion centered
around volatility.
………………………………
First Quarter 2010
WHAT IS OCCAM’S RAZOR?
Occam’s Razor is a principle Volatility drives returns. 2008 gave us absurdly high volatility; and returns were
attributed to William Occam, driven deep into negative territory. We hoped that the high volatility of 2008
a 14th century philosopher. He would die down as mounting losses were becoming physically sickening. Yet,
stressed that explanations must we all also wished that before dying down, the high volatility would give us
not be multiplied beyond what some remarkable positive returns. We hoped this because volatility not only in-
is necessary. Thus, Occam’s Razor creases chances of negative returns, but it also provides opportunity for positive
is a term used to “shave off” or returns; thus, volatility drives returns. In the final three and a half quarters of
dismiss superfluous explanations 2009 delivered substantial positive returns.
for a given event. This concept
is largely ignored within the
investment management landscape.
As of 3/31/2010
This newsletter will “shave off ” Asset Class Index 1Q 2010 1 Year
popular investment misinformation US Large Cap S&P 500 5.39% 49.77%
and present what is important for
achieving long-term investment US Large Cap Value Russell 1000 Value 6.79% 53.56%
success. US Large Cap Growth Russell 1000 Growth 4.65% 49.75%
US Small Cap Russell 2000 8.85% 62.76%
DISCLOSURE The Company only transacts
business in states where it is properly registered, or US Small Cap Value Russell 2000 Value 10.03% 65.06%
excluded or exempted from registration US Small Cap Growth Russell 2000 Growth 7.61% 60.31%
requirements. Please see our
disclosure pages for further detail. INTL Large Cap MSCI EAFE 0.94% 55.20%
……………………………… INTL Large Cap Value MSCI EAFE Value -0.17% 59.49%
INTL Small Cap MSCI EAFE Small Cap 4.82% 70.59%
This newsletter is published by: INTL Small Cap Value MSCI EAFE Small Value 4.49% 75.08%
McLean Asset Management Corp. Emerging Markets MSCI Emerging Markets 2.45% 81.55%
8200 Greensboro Road REIT Dow Jones US Select REIT 9.81% 113.47%
Suite 1150 US Short-term Bond Merrill Lynch One-Year US Treasury 0.25% 1.06%
McLean, VA 22102 US Interm-term Bond Five-Year US Treasury Notes 1.76% -0.07%
Phone: (703) 827-0636 Global Interm-term Bond Citi World Govt. Bond 1-5 Years 0.76% 2.29%
www.mcleanam.com All indices’ returns data are provided by the Center for Research in Security Prices (CRSP). Indices are not available for direct
www.investmentsignal.net investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past per-
formance is not a guarantee of future results.
In the first quarter of 2010, the US equity markets continued its strong perform-
ance with the fourth consecutive quarter of above-average returns. The broad US
market gained about 6% in the quarter, with all asset classes delivering solid
gains. The substantial returns of the last year, shown below, were captured by
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2. disciplined investors with diversified portfolios. It is capturing these types of re-
turns that help us to recover from a negative year like 2008. Over the last year,
churning the portfolio or concentrating positions into select asset classes or sectors
greatly minimized ones chances of recovering. While a lesson in probability and
statistics could help, all we really need to know is that if we have truly global ex-
posure in our portfolio, then our chances of catching return premiums over time
is much improved.
Three Years as of March 31, 2010
The attractive positive returns of the first quarter and of the year ending 3/31/10
would usually be a great place to end a newsletter. If all of our portfolios were
incepted in Mid-March of 2009, we would be feeling pretty invincible, but that is
not the case. We must take the lesson of 2008 to heart. The matrix below shows
that only four of the displayed 15 asset classes produced positive total returns in
the last 3-years, and of the four, 3 of them were fixed income. The fourth being
Emerging Markets.
Total Return April 2007 - March 2010
Asset Class Index Total Return
U Large Cap
S S&P 500 -11.98%
U Large Cap Value
S Russell 1000 Value -20.41%
U Large Cap Growth
S Russell 1000 Grow th -2.33%
U Sm Cap
S all Russell 2000 -11.50%
U Sm Cap Value
S all Russell 2000 Value -16.16%
U Sm Cap Growth
S all Russell 2000 Grow th -7.09%
IN Large Cap
TL M SCI EAFE -18.39%
IN Large Cap Value
TL M SCI EAFE Value -21.71%
IN Sm Cap
TL all M SCI EAFE Sm Cap
all -21.96%
IN Sm Cap Value
TL all M SCI EAFE Sm Value
all -19.80%
Em erging M arkets M SCI Em erging M arkets 17.28%
REIT Dow Jones U Select REIT
S -31.84%
U Short-term Bond
S M errill Lynch O ne-Year U Treasury
S 10.71%
U Interm
S -term Bond Five-Year U Treasury N
S otes 21.50%
Global Interm -term Bond Citi W orld Govt. Bond 1-5 Years 15.28%
All indices’ returns data are provided by the Center for Research in Security Prices (CRSP). Indices are not available for direct
investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past perform-
ance is not a guarantee of future results.
Over this three-year period, value stocks significantly underperformed growth.
This seems contrary to what we preach; however, in looking at the value versus
growth argument, one truly captures the value return premium by investing for
the long-term. The negative returns are primarily due to the performance from
late 2007 through early March of 2009. Despite the remarkable performance of
the last year, the losses are still apparent.
This matrix serves a purpose aside from bringing up painful memories. In retro-
spect, we look at this table and think, “I knew I should have moved into fixed in-
come or reduced my exposure to REITs.” Hindsight is great. But it still is not an
adequate predictor of the future. Would you know when to sell out of the fixed
income and move back into equity? Chances are that you would know after the
fact, just as we can now see what would have provided positive returns for this 3-
year period.
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3. In the last decade, what do the numbers look like? How does extending the time
horizon impact our strategy? Several clients have brought up that returns were
near or less than zero for portfolios invested in the stock market for the last 10-
years. In the following section we will address this comment.
The Last Decade
In the beginning of the year, many in the popular financial media claimed that
2000-2009 was a dismal period for US investors. Some commentators described
the period as the “Lost Decade” in stocks. From a narrow market perspective, they
are right. The US stock market has taken investors on a bumpy ride, and recent
volatility has tested investor discipline and prompted some to question their com-
mitment to equity markets. Investors who concentrated portfolios in US Large cap
stocks did not break even: one dollar invested in the S&P 500 in January 2000
turned into ninety-one cents over the next ten years. The results were even worse
for investors who made concentrated bets on individual companies that ultimately
failed. Names like AIG, Enron, MCI, Circuit City, GM, Lehman Brothers and Bear
Sterns comes to mind.
For disciplined and globally diversified investors, however, the last ten years was
not a lost decade. As suggested in the matrix below, investors who deployed their
capital across a broad mix of domestic, developed, and emerging markets were
generally rewarded with positive returns. Those seeking greater stability were also
able to reduce their portfolio volatility by incorporating high-quality fixed income
into the mix.
Total Return January 2000 - Decem 2009
ber
Asset Class Index Total Return
US Large Cap S&P 500 -9.1%
US Large Cap Value Russell 1000 Value 27.6%
US Large Cap Growth Russell 1000 Growth -33.4%
US Sm Cap
all Russell 2000 41.2%
US Sm Cap Value
all Russell 2000 Value 121.3%
US Sm Cap Growth
all Russell 2000 Growth -12.9%
INTL Large Cap M EAFE
SCI 17.0%
INTL Large Cap Value M EAFE Value
SCI 48.5%
INTL Sm Cap
all M EAFE Sm Cap
SCI all 94.3%
INTL Sm Cap Value
all M EAFE Sm Value
SCI all 146.3%
Em erging M arkets M Em
SCI erging M arkets 162.0%
REIT Dow Jones US Select REIT 175.6%
US Short-term Bond M errill Lynch One-Year US Treasury 45.5%
US Interm -term Bond Five-Year US Treasury Notes 82.0%
Global Interm -term Bond Citi W orld Govt. Bond 1-5 Years 57.7%
MSCI indices are total returns net of foreign withholding taxes on dividends. All indices’ returns data are provided by the Center
for Research in Security Prices (CRSP). Indices are not available for direct investment; their performance does not reflect the
expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
While it was a “Lost Decade” for some, those who walked a disciplined and
broadly diversified path were sheltered from the worst of the storm, reinforcing
the merits of this approach to investing. In an equally weighted portfolio of the
15 asset classes shown above, the average total return was 64.24% for the last 10-
year period.
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