In February 2006 Ben Bernanke will take over as Chairman of the Federal Reserve. The change brings to an end the Chairmanship of Alan Greenspan, which began in August 1987. While much has been written about the change in command, this is but one more bit of news that has been absorbed by the financial markets. Investors should not allow such announcements to prompt any change in their investment plan.

During Mr. Greenspan’s tenure, financial markets provided ample opportunity for wise investors to meet or exceed their goals. Between August 1987 and October 2005, the S&P 500 provided a total annualized return of 10.10 percent. Bonds also fared well, returning 6.83 percent per year, as measured by the Lehman Bros. Intermediate Term U.S. Treasury Index. Price inflation, meanwhile, averaged 3.1 percent annually.

The outgoing chairman has earned a great deal of praise for his “accomplishment” of reducing the rate of price inflation. A 3.1 percent annual rate has come to be accepted as reasonable; after all price inflation exceeded 20 percent when Mr. Greenspan’s predecessor, Paul Volcker, became chairman in 1979. But just as investment returns compound, so does price inflation; it is sobering to consider that during Mr. Greenspan’s 18 years at the helm the purchasing power of the dollar fell by 42 cents.

It remains to be seen whether the Fed under Mr. Bernanke will be able to maintain a rate of price inflation that is relatively restrained. Regardless, it is clear that investors have little choice but to maintain some exposure to relatively risky asset classes, namely common stocks and gold, in order to avoid the steady erosion of their purchasing power. While the rate at which the dollar’s purchasing power will diminish is uncertain, diminish it will, as long as the world’s reserve currency is rooted not in hard assets but in the world’s faith in one individual’s ability to manage the reserve currency of choice.

Also in This Issue:

AT&T Returns
Giving That Keeps On Giving
Barrick to Acquire Placer Dome
Roth 401(k): Gimme or Gimmick?
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield