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May 7, 2009

Dear Clients and Friends,

"If we had no winter, the spring would not be so pleasant; if we did not sometimes taste of adversity, prosperity would not be so welcome." - Anne Bradstreet

The Economy

Rather than present you with recent economic statistics or indicators that are often revised in the months ahead, we have chosen to present you with our interpretation of the state of the economy.

Housing - As the ranks of the unemployed continue to increase, so will foreclosures. This will continue to increase the supply of homes available for qualified buyers. By itself, this would lead to further price declines. However, a reduction in new home construction and buying activity spurred by low mortgage rates and tax credit incentives should help soften further price declines and eventually lead to stability in home prices.

Unemployment - The unemployment rate is expected to worsen before it gets better. Even when the economy comes out of this recession, it will take time to reverse this trend. Employers tend to run lean coming out of a recession in an attempt to recapture profitability.

Banking & Credit - This is the most important sector of the economy that needs stabilization and recovery. While banks are able to make very good profits by lending out at rates significantly higher than they are paying savers, their balance sheets are full of assets of questionable value. Plans to deal with these "toxic assets," either by the banks or the government, have not inspired confidence. Until a clear plan is in place and working to deal with this problem, a key foundation for economic recovery will be missing.

Consumer Demand - Up to 70% of the U.S. economy is dependent upon consumer spending. Could this recession instill enough fear in U.S. consumers for them to change their over-spending and under-saving behavior? Only time will tell. The "paradox of thrift" is currently in play. While most agree that thrift is good, too much thrift undermines the economy. Without demand, businesses lay off employees, reducing the number of people in a position to save. Investing globally allows us to benefit from consumer demand outside the U.S.

Investment Commentary

Historic economic events have driven many individuals to follow monthly, weekly, or even daily action in the financial markets, as if doing so will provide some forecast of their future financial security. Truthfully, this addiction has a greater impact on one's mental health than anything else. Some have the misconception that they fear losing money in the market, which causes them to desire moving into investments that completely mitigate the risk of additional portfolio declines. After thinking about it more deeply, however, most should realize that the real underlying fear is running out of money before running out of life. Managing investments to minimize the chances of running out of money requires more careful thinking than simply addressing near term decreases in portfolio value.

With this in mind, think about what your portfolio is designed to do. It should provide an inflation adjusted payout stream commencing at the time of retirement to the end of life. The objective is to match up assets (investments) with liabilities (current and future living expenses), based on reasonable life expectancy assumptions plus an added buffer. This is one of the key justifications for asset allocation. Very few individuals can invest all of their assets in low risk, low return assets, and still meet all future expenses and other goals. There are two options for the vast majority of people: 1) reduce living expenses so that these payouts can be satisfied by a portfolio of low risk (low return) assets, or 2) prudently accept some degree of portfolio risk. It simply does not work to convert a portfolio to cash without a significant reduction in living expenses.

It helps to put things in perspective when the economy is in a recession and the overwhelming feeling is that the stock market is in an endless spiral heading towards zero. Remember, stocks represent ownership interests in a business. While any individual business can go bankrupt, it is unfathomable that all businesses suffer that fate. In fact, if some companies do go out of business, it usually strengthens their competitors. For example, if Coca-Cola ceases to exist, the natural benefactor would be PepsiCo. Investing in stocks is a way to participate in the profits relating to the global consumption of goods and services. Only zero demand for goods and services can wipe out the profits of publicly owned corporations. Our desire to be owners and therefore participate in profits is entirely based on the fact that global demand has, and the belief that it will, expand in the long run. For the periods of time that demand declines, we liquidate assets such as bonds, which can perform well when demand slows, to pay our expenses until increased demand resumes. Resigning ourselves to using only fixed income such as cash, CDs, and high-grade bonds, would ensure that we earn no more than 0% real (after-tax and inflation) returns.

First-Time Homebuyer's Credit

Family members of clients thinking of buying a home may benefit from a rare combination of incentives. Market prices have declined, mortgage rates are low, and there is an attractive tax credit for certain qualifying buyers.

Under the American Recovery and Reinvestment Act (ARRA), qualifying individuals who purchase a home before December 1, 2009 can claim a credit of up to $8,000 on either their 2008 or 2009 tax returns. A qualifying first-time homebuyer is defined as someone who has not owned a primary residence during the three years prior to the date of purchase. In the case of a married couple, both spouses may not have owned a primary residence within the past three years.

Unlike the credit for 2008 first-time home purchases, the credit for 2009 purchases does not have to be repaid as long as the buyer or buyers remain in the home for three years.

The first-time homebuyer credit begins to phase out for single taxpayers whose modified adjusted gross income exceeds $75,000 or $150,000 for married taxpayers filing jointly.

NOTE: The credit cannot be claimed until the purchase of the home is final.

2008 Tax Returns

Please provide us with a copy of your completed 2008 federal and state income tax returns, along with a copy of any planned estimated tax payments, if you or your tax preparer has not already done so. This information is entered into our tax planning software and enables us to more effectively perform tax planning during the year and at year end.

Schiavi + Dattani Reports

In an effort to improve the timeliness of quarterly reports, we are changing our procedures. Consolidated Portfolio Holdings reports will be sent out as soon as possible after the quarter end without the Open Planning Items report. The Open Planning Items report, which requires reviews and modifications at the advisor level, will be sent out independently. You will receive an Open Planning Items report a minimum of three times per year plus a year-end Tax Planning Recommendations report.

The NAPFA - Kiplinger Money Bus to Visit Wilmington

The National Association of Financial Advisors (NAPFA) is an organization of Fee-only financial advisors. Vincent has been a member and supporter since its inception in 1983. NAPFA has partnered with Kiplinger Personal Finance and others to sponsor a Money Bus that is touring the country to promote financial literacy.

The bus will be in Wilmington at Rodney Square on Thursday, May 28. Vincent, Ravi, and Ryan will be volunteering that day to visit with individuals in need of basic financial guidance in these challenging times.

New Addition to the Dattani Household

Ravi and Raguini are the proud parents of Sofia, born on April 18. We are happy to report that mother and child are doing well.

Few springs have come with more anticipation. May we all take some time to enjoy and appreciate the earth in all of its budding splendor.

Best regards,

Vincent A. Schiavi, CFP®, CPA/ PFS Ravi P. Dattani, CFP®, CPA President Vice-President


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