The first quarter of 2008 brought no respite for investors weary of the market volatility that began last year. The financial crisis that Alan Greenspan has called “the most wrenching since the end of the second world war” only deepened. Overall, however, our multi-asset class approach served investors well. Cash, short-term bonds and gold provided the cushion we expect when equities decline sharply. Each of these provided positive returns, while equities suffered losses and REITs posted a slight gain.

The sub-prime mortgage default problem first spilled over into a general “credit crunch” and then into a full-blown liquidity crisis. Sectors of the financial market that are heavily dependent on lending and leverage continue to unwind. Most recently the short-term fixed income market was roiled by the failure to find buyers for auction rate securities. The Wall Street Journal reported that several large institutions were forced to write down “short-term” investments in client accounts that used these instruments to “goose” yields.

We have always recommended cash equivalent assets, including money market accounts, for liquidity and portfolio stability. Capital preservation is the paramount concern. If your money-market or other “cash equivalent” assets are providing yields that are not consistent with prevailing interest rates it would be wise to examine the underlying holdings.

Beyond the money market issues, the collapse of Bear Stearns and the Fed’s subsequent bailout have highlighted the current risk of holding financial sector stocks. (For AIER’s assessment of the Fed’s actions, see http://www.aier.org). Amidst these developments, investors have grown increasingly nervous at the prospect of maintaining a high level of exposure to large cap value stocks, which are currently invested heavily in the financial sector.

This is, of course, precisely the time to stand firm. While risk cannot be eliminated, it can be measured and managed rationally. While we identify and avoid risks that provide no expected return, we embrace, within reason, those risks that can be expected to provide compensation. We do so by adopting a “value tilted” strategy, and diversifying across hundreds of firms in order to minimize company-specific risk and industry-specific risk. We have not changed our model portfolio allocations, which appear on pg. 26.

Also in This Issue:

Quarterly Review of Investment Policy
Is There an “El Dorado” for Gold Investors? Investment Theory and Practice
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles