ASSET ALLOCATION MODEL for the SECOND HALF of 2003
By Thomas G. Cloud - July 24, 2003

In adjusting our asset allocation model for the second half of 2003, we are taking a similar approach to the one we took for the first half of the year. The two areas in which we recommend changes are the stock and fixed income sectors. Please note those changes as we feel there are opportunities in stocks and hedge funds for the remaining months of 2003. Additionally, we feel the bond market will take a plunge. We have been fortunate to be in a bull bond market for many years; but this writer believes this may change. Over the first half of 2003, the star performer continued to be precious metals with both gold and silver rising 2.5% while platinum rose 7.5%. Our aggressive position in foreign currency also paid off as the EURO and other foreign currencies continued to beat the dollar over the past six months.

It is critical to remember the strategy set forth in Ecclesiastes 11:2 when making changes and when building an asset allocation model. The mandates set forth by God through Solomon calls for us to be good stewards by not having our total focus on investments, but to spread them out among different categories to minimize any sharp plunges in any particular area. The second key in building an asset allocation model is to make a profit. To do so requires a strategy in which one uses seven or eight different investments while placing a different percentage into each area based on the economic dynamics that are currently in place in the various markets. At present, the major thing that is and will continue to impact and drive all investment markets is the Federal Reserve. Of course, the fast-growing federal deficits are and will continue to be a primary part of this impact. Although the Fed has some minimum control on short-term interest rates, they do not have control on the forces that are beginning to drive interest rates higher. The federal deficit is out of control. When Bill Clinton left office, he projected a $150 billion surplus for fiscal 2003. But in reality, we now see that the federal budget deficit ending September 30th is estimated to be over $450 billion. Therefore, the Fed’s power to manipulate interest rates is nearly over. You will begin to see a blood bath in the bond market within the near future. With that in mind, my hypothetical asset allocation model for the remainder of 2003 is as follows:

• Stocks (U.S. and hedge funds only) - 10% to 20%
• Gold Mining Stocks - 5% to 15%
• Fixed Income (bonds and annuities) - 10% to 20%
• Foreign Currency (foreign bonds and physical currency) - 25% to 30%
• Tangible Assets (precious metals, gemstones, rare coins and historical documents) - 20% to 25%
• Cash - 20% to 25%
• Real Estate - 15% to 20%

*While the above asset allocation model is designed to help balance risk and give investors security, we strongly recommends consulting with your own personal financial advisor before making any type of change to your personal, retirement, or profit sharing portfolios.

FURTHER CLARIFICATION
(1) Stocks – This section will be a little longer than normal due to the many changes being recommended for this area. First, hopefully you took our advice in January by putting more money into foreign than domestic stocks. If you did, you have been well rewarded. This trend will continue. Keep more foreign than domestic stocks for the remaining months of 2003. Secondly, it is more important now than in January that you acquire some hedge funds due to the market’s volatility (and continued volatility in stocks for the next three months). We continue to recommend Rydex (and in particular, the Rydex Ursa along with the Rydex Juno) as hedge funds that should do very well over the next six months. You can check these funds out at rydexfunds.com. There are also several sectors in the U.S. stock market to consider. The first is Water Funds as they have been the leader in performance over the past three years. Water has become an even greater diminishing resource. Also some of the value funds are looking under valued, so it might be a good time to add a value mutual fund or speak with your advisor about specific value stocks. We continue to be leery of growth funds and those with very high price to earnings ratios.

Lastly, if you are holding Israeli stocks, do not sell as things seem to be ready to turn around. Do not purchase, but again, do not sell if you are already holding Israeli stocks or mutual funds.

(2) Gold Mining Stocks – This basket should be kept in the range of 5% to 15% of one’s investable portfolio. While gold shares were mixed for the first half of the year, many showed returns of 50% or greater. Keep in mind that it is important to spread the risk over as many gold mining stocks as possible. If you are a small to medium investor, we continue to recommend mutual funds. The ones we recommend are American Century’s global gold fund at (800) 331-8331, Invesco Strategic Gold Fund at (800) 525-8085, and Franklin’s Gold Fund at (800) 342-5236.

(3) Fixed Income – Cut your exposure in this area as quickly as possible. First, for those holding target maturity accounts at American Century, switch them to the Target Maturity 2005 or 2010 at your earliest opportunity. Many top money managers around the world are recommending a zero percent position in bonds for the next six months. With the federal budget deficit growing and interest rates hitting bottom, it is almost a certainty that bonds will take a drop in the current bubble. Investors with long-term bonds, our recommendation is to sell as quickly as possible moving into a money market or shorter-term maturities.

(4) Foreign Currency - This area continues to be one of the two most intriguing areas to watch for the remainder of '03 and perhaps all of 2004 as well. Investors had double-digit returns across the board in foreign currency investments during ’02. This year should be comparable based on the current depreciation rates of the dollar and appreciation of the Euro, Swiss franc, New Zealand dollar, British pound, and Norwegian kroner. Any of these currencies can be purchased and held just like gold. In other words, you assume physical position of the currencies while the dollar continues to depreciate. Investors can also purchase foreign bonds by investing in American Century’s International Bond Fund by phoning (800) 345-2021. Investors can also acquire time deposits or two-day call deposits in foreign currencies. Recently, Sir Harry Schultz increased his recommended percentage of foreign currency to 20% to 25% of one’s portfolio. This is area in which our clients have done well for two years and may continue to do well for the next two years. We continue recommend that 20% to 25% of an investable portfolio be positioned into foreign currency. To discuss the various options, please phone us at (800) 247-2812.

(5) Tangible Assets – As stated above, for the first part of ’02, silver and gold rose 2.5% and platinum saw an increase of 7.5%. We believe the second half of the year will result in greater increases, possibly up to 10% for gold and silver with platinum remaining steady. You may recall that gold rose 24% in 2002, with 18% of that rise occurring in the last half of the year. With the federal budget deficit spiraling, there is no doubt that the dollar will continue its downward trend thus sending gold higher. Also there are shortages developing in the physical silver market and silver has begun to move. We therefore recommend moving a higher percentage into silver as quickly as possible. Remember, we have different wholesale opportunities available in gold daily. Basically, this means you can buy gold at dealer prices without any commission.

We also continue to believe that GIA and EGL certified diamonds (which have shown an appreciation of approximately 5% during the first half of the year) will do well over the next two to five years. Colored gems continue to be a mixed bag with some remaining flat and others showing appreciation due to their international market and fungibility.
Based on the economic outlook for the remainder of this year (and into ’04-‘05), we believe it is critical to hold a minimum position in tangible assets of 20%. Once again, we are happy to discuss your options personally with you. Feel free to phone us at (800) 247-2812.

(6) Cash - With all the uncertainty, your cash holdings should be increased until a more clear direction is seen in interest rates, stocks, and bonds. As we mentioned in January, one should not use standard commercial paper money markets to get higher rates than are generally offered by Treasury bill money markets. Again, keep that cash basket a little higher for the next six months and be ready to take advantage of any market opportunities.

(7) Real Estate - While real estate is not climbing at the rates of the past several years, there are still opportunities in REITS, select rental properties along with standard duplex investments and triple net leases. This basket should be purchased only with cash. This will give the investor higher yields than money markets plus equity build-up.