January 9, 2004

To Our Clients and Friends:

LET'S TAKE STOCK

The numbers are in and the results are impressive. As we said a year ago, "investing has always been about patience," and our patience, discipline, and planning have been rewarded this last year. The pendulum has now swung back to the upside as all of the equity markets are up sharply these last nine months.

As I write this year-end letter, the Dow crossed the 10,000 level. The first time the Dow hit the 10,000 mark was March 29, 1999. At the time, the promises of a new economy and the coming millennium fueled investor's "irrational exuberance" and led to the bursting of the tech bubble in early 2000. In the following three plus years the Dow fell from over 11,700 to less than 7,300. Now that the stock market has rebounded nicely in 2003, investors are regaining their confidence in the improving economy and stock markets.

WHAT DID WE LEARN?

Nothing really. We have a high degree of confidence in our investment process which is based on rational analysis, risk assessment, and most importantly, a dedication to sticking to our game plan. The last four years really reaffirmed what we already new. Chasing performance or investing on emotion can lead to errors. Asset allocation and diversification still are the foundation of success for long-term investors. Patience and discipline are essential to any investment plan. Nothing new there.

Warren Buffet once said, "We know what the markets will do, we just don't know when." We know that the market tends to go up more often than down. We know that it tends to go higher more than it goes down. Since 1972 (the last time the market suffered a severe decline) the S&P 500, a standard index for the stock market has had a positive rate of return in 24 of the last 32 years. The annualized return for this period was over 10%. It is a fact the markets will go down. We need to anticipate that the market will go down, and accept this fact as inevitable. However, we know that historically that the upward trend in the stock market favors the investor. If that is true, the $64,000 question is; "Why do individual investors repeatedly underperform the markets?" The now famous Dalbar study showed that from 1984-2002 the average equity fund investor's annualized return was 2.57% (less than inflation) compared to the S&P 500, which earned 12.22%. This remarkable under performance is primarily attributed to the behavior of the individual investor who chases performance, invests on emotion, times the market, and fails to plan.

As you know, at ZRC Financial Services we place a high premium on reasoned investment planning. We construct portfolios of diversified equities, we do not market time, and we do not chase performance.

ECONOMIC OUTLOOK

The torrid pace of expansion in the last six months is not sustainable. Most published economic forecasts for 2004 show that the economy will continue to grow at about 4%, and that unemployment will fall from 6% to 5 ½%. This steady improvement is a worldwide phenomenon, and is good news for the stock market. We can expect as the economy rebounds in 2004 that inflation will start to increase and that interest rates will begin to rise. As a result, this will cause further stock market volatility.

STOCK MARKET OUTLOOK

So what about the market? As we all know, the market had a strong rally this year as economic data continued to improve. We expect the stock market will continue it's upward trend in 2004 but at a much slower pace. As unemployment falls, expect inflation to revive, and the Fed to increase interest rates. This more than likely will lead to single digit returns for the stock market, a decline in bond prices, and continued market volatility.

As usual, please feel free to call us. We are here to answer your questions, respond to your concerns, and help you make smart decisions about your money.

Very truly yours,

ZRC Financial Services, LLC
A Registered Investment Advisor

By:
         Richard P. Clarke

RPC/rp

P.S. Take a look at the Ibbotson chart on stock performance after a recession.