January 17, 2006
The year 2005 will be remembered for many things including numerous natural disasters, high energy prices and continued Federal Reserve interest rate hikes. At the beginning of the year, the world was still reeling from the tsunami calamity that occurred on December 26, 2004. Although it happened on the other side of the globe, it touched the hearts of many people in America. Throughout the year, we consistently heard about how China’s demand for energy was going to increase the price of oil and other natural resources. Terrorism struck London’s mass transit system as scores of people were killed and many others injured as a result of several bombings. As we saw the price of oil move higher, Hurricane Katrina landed in New Orleans causing billions of dollars in damage. Then, a few weeks later, Hurricane Rita decided to make landfall not far from where Katrina went ashore. The oil refining industry in the gulf region, as a result, came to a standstill and the price of oil reached $70 per barrel. Through all of this, the Federal Reserve continued to increase the federal funds rate each time they met. They had good reason to – signs of inflation were everywhere.
Given everything that took place in 2005, to say the stock market was resilient, I believe, is an understatement. Resilience to me would have been a flat or slightly negative stock and bond market. Instead, we saw the Wilshire 5000, an index commonly referred to as the “total domestic stock market” index, turn in a positive 6.32% for the year. The MSCI EAFE, a foreign stock index, was up 13.54% while the Lehman Brothers Aggregate Bond Index was up 2.43% during 2005.
As you can see from these returns, asset allocation is paramount during these uncertain times. While some of you saw some mutual fund changes within your portfolios throughout the year, your allocation stayed consistent. We continue to emphasize foreign and large-cap domestic equities within the equity portion of the portfolios and high quality, short-term debt investments on the fixed income side of the portfolio. The mid and small-cap domestic equities are value oriented (strong balance sheet and cash flows statements, relatively consistent earnings, lower price-to-earnings ratios) while the large-caps are split 50% value and 50% growth (corporations growing earnings and/or revenue faster than its industry or overall stock market). I feel as confident now about your portfolio as I ever have.
As always, we appreciate your past support and wish you continued health, happiness and prosperity in the new year. We would advise that you meet with us to review your portfolio at least once per year. Enclosed you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of December 31, and a quarterly Account Management Fee Statement. If you desire Morningstar reports or the most recent copy of our Form ADV, Part II, please call us.
Sincerely yours,
William A. Bullock
President
P.S. Please note that the 2005 tax information will be mailed in a separate mailing by mid-February.