Asset Allocation March 15, 2008:

Global markets have been very volatile over the past few months the ongoing crisis in the credit market has created extreme uncertainty for investors. During times of uncertainty it is wise to pull back and reduce exposure to the markets as a prudent method of risk reduction.

The US economy is in recession and it will be some considerable time before the economy turns in positive growth again. The fall out from the housing boom and lax lending practices has created massive over building in the real estate sector and the decline in prices is no where near finished. The US homeowner is going to have to go through a lot more pain before this is finished. The Federal Reserve can only do so much when it comes to the bursting of an asset bubble and it can not stop prices from falling, it can only slow the rate at which financial companies are failing, by adding liquidity to the system and lowering interest rates so that firms and homeowners can borrow at reasonable rates.

The excesses created in the economy are going to be felt for a long time and the US economy will be weak until well in to next year. The real estate and financial services sectors are likely to be weak for years.

At times like this investors should be identifying the areas to stay away from as much as those that may offer an opportunity. Over the next year or longer do not even look at the US financial sector, home builders or real estate investment companies. There will be many times over this period when pundits will say that the prices are so low that they are just screaming to be purchased, do not believe them.  The time to buy will be when these same people have thrown in the towel and are saying that these companies will never recover, not before. Remember the internet bubble, it took over two years before most of the share prices finally stopped going down and the number of failures stopped making headlines, even then it was still too early to buy. This will be a very similar situation.

Investors should be looking at adding to commodity positions such as gold, base metals, oil and agricultural producers and products. These commodity based sectors will continue to do relatively well because demand is not being driven by the US economy and will not be as severely impacted by a US recession.

The current Asset Allocation is quite conservative with only a 20% exposure to equities, 50% in bonds, 30% in cash and will remain that way until there is more clarity regarding the depth and breadth of the current credit crisis.

The equity portion should remain allocated 30% Canada, 30% Asia, 20% Latin America, 10% Japan, 5% US and 5% Europe. Equity sectors to avoid include financials, home builders, consumer durables, autos, travel and tourism.  Sectors that have positive potential are gold, agricultural products and equipment, base metals, alternative energy and energy.

The bond portfolio should hold only government issued bonds with 30% 1-3 years, 30% 4-7 years and 40% 20 years plus. In anticipation of lower rates going forward.