MAY 2010 NEWSLETTER

“Why is my portfolio not following the market up?” This is a common question or concern recently. Or its kissing cousin, “Why do we have so much in money market funds when it earns so little?” The topic for this newsletter was chosen before the market tumult on May 6th. So it is easy to answer the questions above by relaying that most portfolios held value or even went up a little bit that day. We have been transitioning out of what we considered to be very risky sectors of the investment markets into more stable or inverse investments. This transition takes time and sometimes the best place to wait for a better alternative is money market.

We see no real hope for economic recovery in the short term. In fact, there seem to be ticking economic time bombs here and around the world. We want to be able to take advantage of price drops if a dramatic downturn in stock prices occurs. Right now, there seems to be more risk than reward in stocks. Having cash gives us the flexibility to potentially make money even if the markets tread water for a decade. We captured a large upswing in the markets in 2009. The aim is to protect those gains and potentially get your portfolio back to 2007 values slowly over the next few years. The “Buy and Hope” investors may be stuck on the roller coaster for the ups and the downs. We aim to ride only when the risk of loss is deemed to be lower.

Here is an example: BP is in the news now due to one of their wells springing a leak. The ecologic loss is horrible and its clean up cost will be immense. As of 5/14/10, the cost per day for clean-up had jumped from $10 million to $33 million and Barclay’s estimated the total cost will come in around $22.6 billion (Telegraph.co.uk – Rowena Mason) BP’s stock price dropped from $60 to $48 per share in reaction to this news. The annual dividend rate is now up to 7%. In March 2009, BP’s stock price dropped to $35. The dividend rate for shares purchased then would be approximately 9%. This is the type of opportunity we hope to take advantage of in a market downturn. You would get good cash flow from a company that may weather the economic storm well. Then the stock price may recover and provide a nice gain to boot.

In theory and in principle, “buy-low to sell-high” is a no-brainer. In practice, it is not always as easy. As wealth managers we do not wake up and try and chase the quick buck. The objective is to steward you along a path to long-term success and protect that which is most important to you. The key point to convey is that this is a transition. Five months of gains for the S&P were erased in one afternoon on the 6th. While the past two years have certainly been volatile, it is imperative that we retain a long-term outlook to investing and a diligent adherence to managing risk. There are ways to profit in almost any market environment and we are positioned to take advantage of these opportunities.

Until Next Month,

Your Advisors at Dominion Wealth