2003 Third Quarter Commentary
and Planning Ideas

October 16, 2003

By Preston S. Caves, CPA, CFA, MBA

I have enclosed your copy of Caves & Associates’ Market Review for the third quarter of 2003.  The review highlights solid gains for all segments of the equities markets for the second quarter in a row. Positive equities returns resulted from considerable resolution of investors’ uncertainty regarding global investment fundamentals and a general appeasement regarding the situation in Iraq .  On the flip side, U.S. bonds experienced their first, albeit small, quarterly decline in almost four years as yields spurted in July to attract investors.   The backside of the Market Review is a table of global investment returns for the summer quarter and year to date for nine months ending September 30.  A second enclosure headed “Economic Review and Market Perspective” provides a longer-term interpretation of current economic and market data.

As history has shown, markets have an excellent record of rebounding from difficult times. Further, returns are cyclical and have a strong tendency to revert to the mean.  Therefore, the eventual recovery of stocks was inevitable, as was the end of the long bull market in bonds.

I have often stepped on my soapbox to advocate the need for broad diversification and proclaim the futility of market timing.  Also, Caves & Associates discourages focusing much attention on short-term investment results because a broadly diversified portfolio is structured for the long-term.  As we often state, there is no way to completely eliminate short-term risk from an investment portfolio.  As you review the data, think in terms of markets (plural), not “the market.”  You will notice that typically at least some part of your portfolio is providing positive results. 

Our near-term outlook is cautiously optimistic, because of some evidence of an improving economic environment and outlook for corporate profits.  Over the longer-term, a number of global economic imbalances need to be resolved.  We have confidence that the resolution, though difficult, will not preclude a gradual and sustained economic recovery, which will provide justification for current price levels and even the basis for further positive returns for stocks. In somewhat of a paradox, the challenges for stocks should provide the basis for acceptable future returns for bonds by diluting upward pressure on interest rates. 

Nonetheless, it is impossible to consider every possible cause and effect with regard to markets.  Thus, we believe the more useful approach is to maintain a broadly diversified investment plan customized to your specific time horizon which can meet your investment objectives over a variety of potential scenarios.

We appreciate your continued confidence in your broadly diversified portfolio designed by Caves & Associates.

Timely Topics

I had good intentions of publishing a “Timely Topics” every three months.  In case you haven’t noticed, “Timely Topics” has not been published since last November.  I hope to have a next issue soon.

C&A discourages focusing much attention on short-term results because a broadly diversified portfolio is structured for the long-term.  As we often state, there is no way to completely eliminate short-term risk from an investment portfolio.  As you review the data, think in terms of markets (plural), not “the market.”  You will notice that typically at least some part of your portfolio is providing positive results.  Of course, corollaries of diversification that you will also notice are: 1) some parts of your portfolio will always be lagging the market averages, and 2) your overall portfolio return will lag the return of the market’s current hot areas.