Summary, Conclusion and Action Steps

Last year we concluded that “2004 is unlikely to be as easy or as forgiving as 2003”. That has certainly turned out to be true. Even so, it has been a very profitable year. We must now say that we suspect that 2005 may not be as easy or forgiving as 2004. By that we mean that investors will have to stay sharp in order make money in 2005. We enter the year with guarded optimism. It is always easier to feel confident about the short term, so it is easy to say that the first half of the year might be better for equity and real estate investors than the second half. The truth is that we don’t really know that.

We enter the year with a model portfolio that is intended to take advantage of any continued movement upward in value in the equity markets. That is the reason for the allocation of approximately 45 percent to various equities. We have limited equity exposure to the segments of the market that we think might provide the best performance, including a rather heavy weighting to foreign stocks.

We have focused the equity investments in mutual funds that are proven performers in both up and down markets. Our bias in equities is clearly toward “value” over “growth”. We believe this provides us a certain margin for error during times of soft market conditions.

We are also focusing on the “short side” of the market as well, and therefore the 5 percent allocation to “shorts”. This may actually be the safest way to make money in the stock market during 2005. If equity market conditions deteriorate significantly at any time during 2005 we are prepared to significantly increase this allocation.

The rest of the portfolio is designed to perform in a weak dollar, strong commodity environment. We are also positioning the model portfolio to take advantage of any rise in interest rates that may come from market forces reacting to the U.S. bloated deficits.

We are keenly aware that the U.S. economy is walking a tightrope. While the most likely case is for modest economic growth next year, the next most likely case is recession, and even “stagflation”. We will be keeping a very watchful eye out for changing conditions.

We believe that our model portfolio represents an extremely thoughtful selection of asset classes that should provide competitive investment returns while reducing portfolio volatility for our clients during 2005. The outline of that model, as presented in this report, is backed up by very high quality asset selection.

We will be constantly rebalancing portfolios throughout 2005 with a goal of maximizing investment performance while reducing portfolio volatility.

We are looking forward to the New Year and the many opportunities and challenges that it will bring. We look forward to working with our clientele and our friends and peers in the industry.

Respectfully submitted,


Paul Krsek & Robert Andreae

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