April 6, 2005

To Our Clients and Friends,

Key Bubble Lessons

Five years ago, the new millennium started with such promise. Everybody was in the market and making money. All of the major indexes closed at record highs in the first quarter of 2000. Few people were prepared for what was to come as the stock markets headed lower and eventually tumbled to five and six year lows. Infectious enthusiasm gave way to fear of investing. As billions of dollars evaporated, so did investors who did not have an investment plan or any discipline. Unrealistic expectations, a lack of a long-term investment strategy, and emotional investing created the perfect storm for novice investors. Thus many undisciplined investors missed the inevitable rebound of the last two years.

The Key Is Rebalancing

You might have noticed a flurry of activity in your account recently. We normally are not active traders, but winter is the time of year when we look closely at our holdings and we replace no load funds that have not met our expectations. We also perform another important function at the same time when we rebalance accounts. We invest your assets according to your individual asset allocation preference. Invariably, the asset allocations will get out of whack as some areas of the market out perform others. An unbalanced portfolio may give you more risk than you want. When we rebalance, we move back to the original asset allocation. In effect we are selling a percentage of the winners and buying more of the 'losers', i.e. we are selling high and buying low. A good investment strategy that allows us to buy funds 'on sale'.

A Diversified Portfolio is Key

. . . to having a successful investment experience. The divergence of returns across asset classes in 2004 underscores the benefits of diversifying your portfolio, both across asset classes and geographically. For the five-year period ending last year, REITs performed the best, followed by bonds. The S&P 500 was the worst performer although

it was the best performer in the five year period ending in 1999. The lesson to be learned is that leadership among asset classes frequently changes but the timing of these dynamic shifts is difficult to predict. Thus, one of the best approaches for achieving long-term gains is to invest in a diversified portfolio over the long-term. Then all you need is a healthy dose of patience and discipline to allow the markets to do what they do best. Grow your assets over time. You are likely to have a successful investment experience if you adhere to this investment philosophy.

A New Dimension

Late last year, we formed a strategic alliance with an institutional investment firm call Dimensional Fund Advisors (DFA). We now have access to institutional-class funds that were previously unavailable. DFA is a Santa Monica money management firm that has Nobel prize winners on its board and whose founders, Rex Sinquefield and David Booth, created their money management philosophy on research performed by finance professors, Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. Based on Fama and French's research, DFA has structured many of its mutual funds to capture the return premiums that it believes are associated with high book-to-market stocks (value stocks) and small market cap stocks. You might have noticed that in your portfolio, we have purchased one or two DFA funds. DFA has a publicly available website if you are interested, www.dfaus.com.

Remember

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

Very truly yours,

ZRC Financial Services, LLC
A Registered Investment Advisor

By:
         Richard P. Clarke