A Word From The Advisor
Wealth Building through the Management of the Asset Allocation Decision

Wealth building entails a viable plan that encompasses setting your objectives, assessing the level of risk you are willing to take, estimating the time that it will take you to reach your goals, and then sticking with your plan. There are a dizzying variety of investment vehicles available to help you achieve your plan: stocks, bonds, real estate, gold, commodities, to name but a few. What many investors, novice and veteran, find to be one of the greatest challenges in devising and maintaining their plan is the difficulty in predicting economic trends and their effects on different investment choices, over even a relatively short time horizon. There are so many variables that can alter the economy’s performance, and even when one’s prediction is correct, the markets’ reactions may be completely different from the expected outcome.

The Federal Reserve Board (Fed), in a key phrase from their most recent statement, said that their next move will depend on, to a large extent, incoming economic information. This information takes the form of housing market and unemployment figures, inflation measures such as the Consumer Price Index (CPI), manufacturing orders, and additional data. The Fed’s interpretation of this data, notwithstanding an exogenous “shock” to the system like a natural or geopolitical occurrence, will be an important factor for the markets’ direction for the remainder of 2006. We don’t pretend to know the outcome of the Fed’s next meeting in August, or the meeting thereafter. This is why we believe it is critical to adhere to a plan that incorporates risk and expected return objectives, using either equities or fixed income or a blend of each.

Clients’ goals and expectations change over time, and so do markets and opportunities. Each investor is unique, and as such, has their own individual profile and ability to weather the volatility that accompanies different investments. The graph below plots annualized total returns versus volatility over 20 years for various asset allocations of stocks and bonds, using market indices, and illustrates the range of returns and volatility of a portfolio of 100% bonds, 100% stocks, and blends using different percentages of both. As can be seen from this illustration, stocks have historically provided the potential of a higher return but also have a higher level of volatility, while bonds focus on diversifying risk, generating income, and preserving wealth, with low volatility. Over the 20-year period starting in December 1985, a portfolio containing 60% stocks tracking the S&P 500 and 40% bonds tracking the Lehman Aggregate Bond Index provided 89% of the returns of an all-stock portfolio, with 36% less volatility. Add in the potential that active management provides, and you have the opportunity to significantly increase the returns.

Oakwood offers the ability to establish a portfolio using equity and fixed income strategies and blends of those strategies that will fit clients’ risk tolerances and expected return objectives. Wealth building now becomes a controlled plan as opposed to an endless prediction of outcomes and the effects of those outcomes without discipline.

While many investors have the time horizon and risk tolerance that makes the choice of 100% Equity Strategies the best fit for them, other investors are at the stage in their particular investment situation that makes the choice of 100% of Fixed Income Strategies the best. For many others, however, it makes sense to choose a balanced portfolio, which is a blend of these strategies. Two of Oakwood’s strategies, the Balanced Growth Strategy and the Balanced Income Strategy, provide our clients with the ability to tailor their portfolios to their long-term investment return and risk objectives.

The Balanced Growth Strategy places greater emphasis on equities than fixed income instruments, and is suitable for clients seeking long-term growth that is consistent with preservation of capital. Typically, the Balanced Growth Strategy will be comprised of 60% equities and 40% fixed income.

The Balanced Income Strategy places greater emphasis on fixed income instruments than on equities, and is suitable for clients seeking preservation of capital, moderate income and moderate growth. Typically, the Balanced Income Strategy will be comprised of 60% fixed income and 40% equities.

At Oakwood, we are proactive in the management of fixed income and equities in these and all of our strategies in order to identify quality opportunities for investment. Oakwood’s investment approach for both fixed income and equity securities encompasses the following basic tenets:

• Both fundamental and quantitative disciplines are employed to identify attractive securities;
  
  
• Diversification is used to control risk; and
  
  
• Sell disciplines are an integral part of the investment process.

Changes in markets can lead to opportunities. As market results are periodically reported and assessed, each investor must carefully examine long term objectives, determine whether or not sensitivity to risk has been further heightened or lessened by current volatility or market action, then ensure that the portfolio reflects the appropriate mix of stocks and bonds. Oakwood is committed to client service and client communication. We invite you to share with us your questions and concerns regarding your asset allocation, or any other investment topic.