Welcome to 2012. I hope each of you have had a good start to the New Year! It wasn’t until I spent some time reflecting back on 2011 that I began to realize how much transpired last year. Considering the last performance report I sent was at the end of the meltdown of the 3^rd quarter, I am pleased to be sending out the 4^th quarter updates. I confess, though, I’m more eager to have you open your January statements.

In this letter I want to take a few moments to teach a brief lesson about “the markets”. I continue to get questions about why our portfolios are down slightly for 2011 when “the market was flat or up”. By “the market”, we usually mean the Dow Jones or the S&P 500. Even the attached performance reports can be somewhat misleading because they include only two indexes for comparison.

The fact is, there are many ways to slice and dice different investments and each segment can be regarded a market of sorts. A way to measure these markets is with the use of an index. Within stocks alone, major categories include domestic and foreign, small, medium, and large company stocks, and growth and value stocks. Within bonds major categories include U.S. treasuries, corporate investment grade, high yield, and municipal or tax-free bonds. In our investment portfolios we try to include all of the above to some extent. And in simple terms, the longer the investment time horizon, the more we weight stocks. For those that might be interested, I’ve included some basic definitions of a few of the most common indexes at the end of my letter.

Note: We use QQQ as our proxy for the Nasdaq index

Each of you has heard me preach about diversification. I often joke, too, that if we diversify properly something will do poorly. Last year that something was clearly international stocks. Although small company stocks were down, it was the foreign stocks that took a beating. At one point I considered writing about some of the events that shaped 2011. A short list included earthquakes and tsunamis in Japan, flooding in Thailand, major political upheaval in the Middle East, leadership change in North Korea, and the ever-present saga of the Euro zone debt crisis. With headlines like these and the uncertainty they create, it is a wonder that we have recovered from the summer meltdown as well as we have.

So what do we do now? Many of us are convinced that much of the economic growth this next decade will happen outside the U.S.  Many of the companies that will grow and thrive as a result are based outside this country – they are foreign investments. Sure, I’m frustrated that our exposure to the international markets last year hurt our performance, but I’m as convinced as ever that going forward we need to continue to hold the best companies in the world, regardless of where they are based.

Let me conclude, as always, by saying thank you. We at Sage genuinely appreciate you allowing us to partner with you to meet your financial goals.

A few basic definitions – (1)

• Dow Jones Industrial Average – the oldest (Charles Dow – 1896) and most watched index. This is perhaps the narrowest index consisting of only 30 stocks traded on the New York Stock Exchange and the Nasdaq.

• Standard & Poor’s 500 – An index of 500 stocks chosen for market size (large), liquidity, and industry grouping, among other factors. These 500 stocks are market value weighted, meaning that the larger stocks have a greater impact on the index than do the smaller company stocks. This is my favorite index to follow with regards to large US stocks.

• Nasdaq Composite Index (measured above by the QQQ) – The Nasdaq is a market-capitalized weighted index of the more than 3,000 stocks listed on the Nasdaq stock exchange. Because the Nasdaq is market-cap weighted and because of some of the large tech companies that are in the index, we often hear it referred as a “tech heavy” index.

• Russell 2000 Index – An index measuring the performance of the 2,000 smallest companies in the Russell 3000 index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 200 serves as a benchmark for small cap stocks in the U.S.

• EAFE (Europe, Australia, Far East) – As the acronym implies, this index is a foreign index representing the most developed areas outside North America. This is often used as good index of foreign companies.

• Barclays Aggregate Bond Index – This bond index is market-cap weighted and is designed to measure investment grade bonds. It excludes municipal bonds and TIPS, but is deep with U.S. Treasury securities, Government agency bonds, Mortgage-backed bonds, and corporate bonds.

(1) Definition help from Wikipedia and Investopedia.

Written by: Russell D Cole, CLU, ChFC