June 30, 2001

Lots of "window dressing" happened this quarter as money managers raced to sell bad positions on Friday June 29th to make their quarterly performance figures look good. This caused a 3.65% plunge in the NASDAQ as well as a 2.17% drop in the Dow Jones Industrial Average on Friday alone. As I write this, all indices have made up those drops. Whether the indexes will stabilize or sag back to their lows depends on earnings and consumer confidence. Mr. Greenspan usually helps with a drop of interest rates here and there. But that hasn't helped the economy as much as it usually does because the banks have already lowered 30 year rates from 8.5% to 7% last fall and are reluctant to lower them any further due to inflationary concerns. The rate cut was good news for the corporate sector because it makes capital borrowing costs much more attractive.

Lower interest rates alone won't bring the economy back. Even with the lay-offs the unemployment rate is still at a low 4.5% and inflation is in check and the consumer confidence index is slightly up. So what's to keep it all down? Negative earnings reports. The press plays up these lower or negative earnings reports - but I think it is a good thing. Why? Because just like in the go-go 80s- there is a lot of corporate fat that needs to slim down in order for the true value of companies to be seen. Fourteen months after the onset of the first bear market of the new millennium, there are signs that the worst is behind us and the stage now appears to be set for an upward trend to develop. In other words, a market that's meandering around a bottom presents an opportunity to clean up portfolios and position for the next round of growth.

The market drop seems especially harsh since it comes on the heels of two decades of incredible market performance. Our current bear market is not abnormal within historical context. I can help you develop an investment plan that reduces uncertainty and help you avoid reactive, emotional investment decision that you may later regret. One of the most common investor mistakes is to sell an investment near the bottom of a bear market. Many investors do this because of emotional reasons such as fear and panic. The way to overcome these feelings and help you make rational decisions is to develop an investment plan preferably before a correction strikes. A full 1/3 of investors' returns are lost by making mistakes such as switching funds too often, buying high and selling low and paying taxes unnecessarily. We adjust your allocation based on your goals and time horizon rather than attempt to catch short term swings in the market. It really doesn't matter what direction the market is going. Your portfolio will go up and it will go down. The important thing is that the average return on your money meets your goals and allows you to sleep well at night.

Even Motley Fool subscribers are suffering. "Who was I kidding, thinking I could do this on my own?" scoffs Bruce Corigliano, a former Fool follower who in 1999 invested his children's college funds in the Fool Guide in order to get 25% annual returns. (Historically, stock returns have averaged 11%.) In 2000, Dr. Corigliano has lost 30% of that money.

According to Spectrem Group, a leading research firm in Chicago, one-third of households with $500,000 or more in net worth use an independent advisor. That is up from virtually zilch two decades ago. During that period, the portion of affluent households using full-service brokers eroded and is now no larger than the group using advisors. Why the gains by independents? Spectrem cites their ability to develop deeper client relationships and increase client loyalty. "Independent advisors are perceived to listen to the needs of their clients and tailor investment recommendations specifically to those needs," says Judy Danielson, director at Spectrem.

Growth Vs. Value Styles. Growth managers tend to buy stocks that are experiencing rapid growth in earnings, sales, or return on equity. Value managers tend to buy stocks that are undervalued relative to their estimate of a company's trust value. Growth funds of all types outperformed their value peers in 1998 and 1999, the average large cap growth fund is down more than 33% over the past 12 months, compared with a 3.2% gain for the average large-cap value fund. What's the lesson here? The decline demonstrates the importance of diversifying across both investment styles so you do reasonable well no matter which style is in favor. "A year ago, people wouldn't touch value," Prof. Siegel of Wharton says. "Now they won't touch growth. It's a total change in psychology based on what's happened in the last year or two. That's no way to plan a portfolio."

The Economic Growth and Tax Relief Reconciliation Act of 2001 is here-. Taxpayers will be entitled to a credit for 2001, payable in the form of a check issued this fall by the Department of the Treasury. Check amounts will be $300 for single filers, $600 for married, and $300 for heads of households.

My website is up and operational. You can access your statements from my website (http://www.afdadvisors.com), but you must first call Schwab (800-865-3864) and get a password to do this. Note- that Schwab has a new design to your statements this month.

- Fern Alix LaRocca CFP® EA