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April 25, 2011

Dear Clients and Friends:

Recent World Events

The world and its financial markets have plenty to be concerned about: from political turmoil, social unrest, revolutions in Egypt, Libya, and Yemen, to the massive earthquake, tsunami, and radiation troubles in Japan. Within our borders politicians at both federal and local levels seem unwilling, or unable, to effectively deal with the financial challenges they face. The U.S. economy seems to be on a road to recovery, but seems to be taking its good old time getting there. Housing and employment, two of the most important segments of the economy, have stubbornly resisted significant improvement. Government reports of inflation may seem benign, but how realistic are they when policy makers insist on using core inflation numbers that exclude food and energy. Rising prices in those two areas hit most households where it hurts.

What are investors to make of all of the above? Keep the focus on the big picture and attempt not to overreact to specific events, which can be more harmful than inaction. The world economy is so large that it can withstand a number of disasters and country-specific challenges. That is not to say that world-wide growth will not be slowed by political turmoil and natural disasters, it will. Just that it will take a series of severe events to deflate a world-wide march toward economic expansion fueled by emerging economies. Regional diversification is your friend in times like these.

Privacy Issues

Electronic social networks, such as those found on Facebook, Twitter, and MySpace, to name a few, are becoming a source of danger for wealthy families. Members have been known to disclose their whereabouts, including whether they are alone at home or on vacation, and the economic status of their households through pictures of expensive homes and personal property. Viewers with criminal intent can receive enough information to put lives and property at substantial risk. If you, your children or grandchildren frequent these social networks, we encourage you to think carefully about what you disclose and to have that discussion with family members. Young people are specifically at risk in this area because of their frequent use of these media, their lack of awareness of the potential danger, and their overly trustworthy nature.

Do Older Investors Make Better Investment Decisions?

This was the title of a recent research paper by George M. Korniotis (Board of Governors of the Federal System) and Alok Kumar (McCombs School of Business, University of Texas at Austin).

They examined whether older people make better investment choices as they gain more investment knowledge and experience, or whether their investment skill deteriorates with age due to the adverse effects of cognitive aging.

The authors’ conclusion was as follows:

"Consistent with the theoretical predictions of life-cycle and learning models, we find that older and more experienced investors hold less risky portfolios, exhibit stronger preference for diversification, trade less frequently, exhibit greater propensity for year-end tax-loss selling, and exhibit weaker behavioral biases. And consistent with the psychological evidence, we find that older investors exhibit worse stock selection ability and poor diversification skill. The age-skill relation has an inverted U-shape and, furthermore, the skill deteriorates sharply around the age of 70. These results suggest that older investors exhibit a greater propensity to use common investment rules of thumb but they appear less skillful in successfully implementing those rules."

Why are these findings important? First, as fewer retirees benefit from pensions, more responsibility has shifted to personally building and managing assets to fund retirement. Second, increases in longevity mean that financial resources are being asked to fund a lengthening period of non-working years. Combine those factors with the sharply declining ability to manage assets after age 70 and you have a recipe for a major problem for society in general. Will it result in a greater need for government assistance for those who have mismanaged their finances? If so, this challenge will occur during a time when Medicare, Medicaid, and Social Security are projected to be severely strained.

What relevance is this for the readers of this Newsletter? We believe the authors’ findings reinforce the benefits of our service, even for those that have prudently managed their own finances for many years. Also, their research suggests that the need for professional assistance is growing.

You may become aware of a family member or friend that may be unknowingly putting their financial security at risk as they move through retirement. A nudge from you may help them retain a trusted financial advisory firm before it is too late.

Form ADV Part II Revision

The SEC recently required all registered financial advisors to rewrite Part II of their ADV. This is the mandatory disclosure document provided to new clients prior to engaging a federally registered investment advisor. We are required to make this revised document available to existing clients in a timely manner. As a result, we have included it as an attachment to this Newsletter. Please forward any comments you have to Vincent.

2010 Tax Returns

Please provide us with a copy of your completed 2010 federal and state income tax returns, along with a copy of any planned 2011 estimated tax payments, or authorize your preparer to do this for you. We enter this information into our software, enabling us to more effectively perform tax planning.

Finally, we appear to be breaking from the shackles of an unusually cold and long winter. Spring is a season of hope and the anticipation of better times ahead. We are thankful for its arrival.

We continue to work daily to earn your trust and confidence.

Best regards,
 
Vincent A. Schiavi, CFP®, CPA/ PFS               Ravi P. Dattani, CFP®, CPA

President                                                       Vice-President

                                               

Enclosures



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