rodgerscapital.com		Volume 3, Issue 4, December, 2006

Steve Thorne   It has been active year for our portfolios.  In March we determined that the economic environment was less favorable for small stocks, which have long been a favored asset class in our portfolio allocations, than large stocks.  With interest rates still rising at that time, small stocks faced more pressure on their earnings from increased costs than large companies that have other sources of capital available to them.  Accordingly we cut our allocation to small stocks in half and reallocated the dollars to large stocks—a reallocation of 6% of client portfolios on average.  Since April 1 large stocks, as measured by the Russell 1000 index, have increased by 7.1% while small stocks increased over the same period by 4.3%. Recently we have modified our basic allocations again.  In August, 2004 our fixed income allocation shifted from 3-7 year bonds to 1-3 year bonds to avoid the negative effects of rising interest rates on fixed income investments.  In our opinion, while rates may continue to rise somewhat, the majority of the increases are behind us.  As a result we are shifting back to the longer duration bonds.  Our client portfolios experienced less volatility from their fixed income allocation during the last 2 years because of this strategic reallocation. In addition we continue to believe that small stocks will struggle in this economy and have identified large technology stocks as a sector that has lagged recent market growth.  We view this as an opportunity and will reallocate from one segment to the other—once again these changes represent approximately 5% of our clients’ portfolios. My point in rehashing these changes is to illustrate our methods and our devotion to measuring results of decisions.  Our changes tend to be small relative to the whole portfolio but they pay dividends in higher overall returns and greater stability.  The relative stable content of the portfolios results in a lower tax burden for our taxable clients.  As a fee only investment advisor we are free to concentrate on portfolio results and not portfolio activity. At this time of year when most people’s thoughts are turning to the holidays we will use the period to examine our clients’ portfolios for tax planning opportunities.  As a cross-disciplined wealth manager we know that it is not so important how much we make for our clients as it is how much they get to keep after taxes are paid.  So, while some have visions of sugar-plums we dream of capital gains management. May God bless you and your family with a Merry Christmas and a Happy New Year. by Steve Thorne Steve Thorne is Managing Director of Family Wealth Management, LLC. and is based in Nashville, TN. He can be reached at (615) 383-8600 or steve@fwmllc.com   Manufacturing activity in the United States diminished in November for the first time in 3 ½ years.  At the start of the month, the Institute for Supply Management reported that its manufacturing index fell to 49.5 from 51.2 in October (anything below 50 indicates a contracting manufacturing sector), which suggests that the Federal Reserve exceeded the mark during the two years of rising interest rates that ended in June.  The ISM’s report coincided with a significant fall in bonds, equities, and real estate. Ben Warwick Speculation that an interest rate cut is on the horizon caused the dollar, which is dependent on higher rates, to fall and prompted increased interest in the fixed income market.  As the month progressed, government bonds rallied, with the yield on the benchmark 10-year Treasury note falling to a 10-month low.  Although REITs had lost ground at the beginning of November, they recovered mid-month and have continued to show surprising resilience to the housing market slowdown. While many believe that the Fed will maintain the current interest rates at 5.25 percent at its next meeting on December 12th, the prospect a Fed cut in 2007 seems eminent.  The Federal funds interest rate futures reveal that markets are pricing in a 64 percent chance of a Federal rate cut in the first quarter of 2007. by Ben Warwick © 2004 Wicks Business Information, LLC   Ben Warwick is chief investment officer of Sovereign Wealth Management (an affiliate of Family Wealth Management) in Denver and the author of Searching for Alpha: The Quest for Exceptional Investment Performance (Wiley, 2000) and The WorldlyInvestor Guide to Beating the Market (Wiley, 2001). You can purchase these books at the IA Bookstore at http://www.invest-store.com/investmentadvisor/ Family Wealth Management 2000 Glen Echo Road, Suite 101 Nashville, TN 37215 Phone: 615-383-8600 Send this newsletter to a friend. Click here to join by sending an email to us.