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Asset Allocation: April 2011

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If oil prices don’t go above $150 per barrel, it could be a good year, with mid- to high-single-digit growth in the S&P. Additionally, the Fed could initiate a tightening program, and we expect at least another pullback, if not another correction. We’re going into the third year emphasizing cyclical sectors because those are hurt least by increasing interest rates. Materials may do well, as long as oil prices stay down. We recently downgraded the consumer discretionary sector. That sector is slightly cyclical so we’re not enthusiastic about utilities. Drug pipelines and austerity measures in Europe could be a challenge to health care.

Don’t think diversification failed us. Our memories and expectations failed us. In a bear market, there’s no place to hide but cash and Treasury bonds. It doesn’t matter the style, size or region of equity markets, they’ll go into a tailspin. In modern portfolio theory, you want to try to maximize returns and minimize risk, not eliminate risk entirely. Some people were too far out on the risk curve. People forgot that old adage that your stock risk should equal 110 minus your age. Many people did not have time to make up their losses. Always remember that if you have five years or less to retirement, you should focus on return of your money. If you have more than five years, you should focus on return on your money.

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