A. Statistics

    Details of the overall portfolio in 2005 are as follows:
 

Year	Rate of Return	Inflation	Real Rate of Return
1981	15.0%	8.0%	7.0%
1982	15.4	3.0	12.4
1983	16.0	4.0	12.0
1984	9.8	4.0	5.8
1985	18.3	4.0	14.3
1986	13.8	1.5	12.3
1987	9.7	4.0	5.7
1988	18.0	4.0	14.0
1989	10.7	4.5	6.2
1990	0.7	6.0	-5.3
1991	14.9	3.1	11.8
1992	10.0	3.0	7.0
1993	13.7	2.6	11.1
1994	0.3	2.7	-2.4
1995	13.2	2.7	10.5
1996	15.5	3.0	12.5
1997	6.9	1.8	5.1
1998	-4.5	1.5	-6.0
1999	-2.3	2.5	-4.8
2000	15.3	3.3	12.0
2001	19.2	1.5	17.7
2002	-0.6	1.5	-2.1
2003	25.2	2.2	23.0
2004	9.9	3.4%	6.5%
Average 24 years	11%	3.3%	7.7%

 
 

B. How has the portfolio performed in  2005?
 
         I should reiterate that we run a balanced portfolio so it is not directly comparable to the main stock indices, but I list them because, through time, they have provided the best overall returns of any asset class. They have also been very volatile and had periods when they experienced significant losses. Our goal with the portfolio is to try to capture most, but inevitably not all, of the returns available to this asset class and, simultaneously to experience very little of the volatility that accompanies superior returns.

        The period since the end of the third quarter has been best characterized as “challenging” although most market participants would tend to use more colorful words to describe the difficulties experienced over the last three weeks. The main indices do not show the extent of the damage, which has been widespread and, particularly concentrated in the few areas that had done well earlier in the year. The energy sector has been particularly hard hit and losses of 20% are commonplace.

 Over the life of the portfolio it has performed in the following fashion:

         Volatility is a measure of how much a portfolio gains or loses in a given period and, generally, the bigger the gyrations the greater the stresses felt by the investor. My goal is to make the ride as stress free as possible and also to capture most of the returns offered by the riskier and more volatile asset classes. We succeeded in doing this over the first 24 years of the life of the portfolio and it would be very pleasing if we could repeat it in the next 24 years. At that point I think retirement might look like a very viable option. ?
 

D. Blogs (Weblogs)

        Nancy and I are in the process of creating two weblogs which, for those of you who are unfamiliar with the concept, act as easily accessible and interactive diaries and are an increasingly popular way of disseminating ideas on the internet. They should be up and running by the end of this week and Nancy will send you an email with the details for viewing and for interactivity.

        The two blogs will be my blog, which will focus on all aspects of money management and on the management of the portfolio, and Nancy’s blog, which will focus on all aspects of financial planning. The interactive feature is the feature where you can add comments (always welcome) and questions. You can add them anonymously, use a first name or, indeed, identify yourself. The blogs are not exclusively for our clients, but we are keeping a very low profile and the intent is to create another tool that you can use and another way for you to interact with this office. In my case it will provide a lot of background (the whys and wherefores of the portfolio) and it will be a place where information is available between my regular reports. The planning blog will, over time, be a source of information on all kinds of planning issues and the categories should be self explanatory. As Nancy adds articles she will contact our clients who are directly affected by the article and she will follow up with you after you have had a chance to refer to the article.

         We have a number of clients who, perhaps wisely, have not joined the computer age and we will continue to contact you by telephone and by mail and we will send hard copies of any pertinent blog articles.
 

E. Summary

         I wrote this at the beginning of this year:  “I remain convinced that we have the probability (much higher than would usually be true) of extremely turbulent waters in the next 12-24 months. I intend to be appropriately cautious and if I am wrong in the outcome we will forgo some potential gains, but if I am right, or even partially right, we will avoid potentially large losses. If things do, indeed, get out of hand economically we will not avoid all losses, but we will live to fight again.”  I am still firmly of the belief that the risks in the current environment are much greater than usual and the events of the last three weeks are a cause for some concern. If the more extreme negative outcomes occur we will NOT be immune, but our losses will be relatively mild and will NOT be permanent.

        We are conservative value based investors with the following attributes:
 

• The portfolio returns are unpredictable over shorter periods of time. We recognize that we cannot control price movements and we cannot control what will outperform in the next month or even the next year
• It is extremely unlikely that we will have significant losses and, even if we do, those losses would NOT be permanent. We expect a minority of our investments to be unsuccessful for a variety of fundamental reasons.
• We will have losing years. That is part of the process.
• It is highly likely that we will attain our longer term goals for the portfolio.
• Our investment management is carefully, and individually, integrated with our financial planning on your behalf. We maintain a diversified portfolio.
 
 

         Please call if you have any questions or concerns. We are always available and are happy to talk, answer questions and, hopefully, to provide useful advice and answers.