Our suggestions for portfolio construction in the wake of the 2008 financial crisis.

1. Thoughts on the Market & Investing
Our Strategy for Portfolios in the Post-2008 Environment
The Foley Group
September 2010
Having come through one of the most significant financial disasters of modern times, and with
the economic recovery remaining notably tepid, we thought it might be useful to examine the
strategic thinking that underlies our portfolio construction process. We believe that conditions
may remain challenging for years to come. If that is the case, investors will have to work hard to
achieve positive results. The purpose of this letter is to describe our vision of what is to come,
and our plan for dealing with it.
Outlook
We are a society mired in debt. Conspicuous consumption reached absurd heights in the years
leading up to the economic collapse. Americans drained equity from their homes to fund
spending. There were some particularly ugly examples of foolishness, wretched excess, and
outright fraud in the corporate world. Meanwhile, government regulators and credit rating
agencies seemingly turned a blind eye to the growing risks. In 2008 it all came crashing down in
the most dramatic economic crisis since the Great Depression. At that point, through bailouts
and an attempt to spur a recovery, the U.S. Government added unprecedented levels of debt to
what was already a considerable national burden.
With our nation so indebted and facing huge healthcare and Social Security obligations, we fear
a prolonged period where rapid sustained growth will be difficult to achieve.
After trending lower for nearly three decades, the savings rate among American consumers has
risen in the wake of the crisis. That’s a positive development and will ultimately make us a more
financially healthy nation. But if the trend toward saving continues, consumer spending will not
be the economic driver it once was. Meanwhile, government debt is likely to act as a brake on
the economy. As growth returns and interest rates push higher, those rates will impact the
enormous debt, raising costs and slowing things back down. Taxes will rise to deal with the
pressures of debt and social welfare obligations, providing another hindrance to growth.
There are long-term market trends that seem to dovetail with the idea that economic headwinds
will be with us for a while. Bull or bear market trends are sometimes referred to as being either

2. cyclical (fairly minor in impact or duration) or secular (significant and prolonged). There were
three secular bear markets during the last century: 1906-1921, 1929-1949, and 1966-1982. 16
years, 21 years, and 17 years. If we are in the midst of another secular bear market, it began in
2000. That puts us ten years in.
So if we accept (or even just fear) that we are a bit more than halfway through the fourth secular
bear of the modern age, the question becomes: what do we do about it?
In difficult times it may be tempting to throw in the towel and park your assets in the “safety” of
cash, but that means accepting the certainty of a predictable loss over the uncertainty of an
unpredictable loss or gain. Inflation, with rare exceptions, will eat away at your holdings every
single year. Would you put your money in an investment that returned a negative 3.43% on
average, year after year? That is the reality of inflation. It is an intangible danger that lacks the
drama of a market crash, but the impact is real, and can be devastating for its relentless nature.
In a storm you give considerable thought to how well your boat is constructed. So it is with
investment portfolios right now. In an effort to invest as well as we can in a time when getting it
right might really matter, we have undertaken an analysis of investment theory on a number of
levels, and we have reached some conclusions that are impacting our approach.

3. Active vs. Passive
There is perhaps no greater debate in the world of investing than active vs. passive. It is as
elemental as the toilet paper question: “over or under?” (the correct answer to that is “over”, by
the way). Central to the issue is whether markets are efficient or not.
One side argues that so much information is available, and the market in aggregate is so well
informed, that nothing is to be gained by attempting to game the system through active
management of investments. This philosophy argues for index investing. Using indexes –
essentially unmanaged “baskets” of stocks - has certain unquestionable advantages. First of all,
it can help keep expenses low. Paying less in expenses is one of the few “sure things” in the
investment world: lower expenses translate directly to the bottom line. Index or “passive”
investing also has advantages in terms of tax efficiency, because a low level of trading helps
minimize realized gains, providing tax deferral. Finally, studies have shown that the average
managed fund fails to provide index-beating returns.
While there is certainly merit to the index argument, what do you do about an index that isn’t
headed anywhere? The S&P 500 is the one most commonly tracked by investors. Over the past
decade, that index has returned nothing (actually, as of 9/15/10, it has lost money when you look
back ten years) . The concept of set it and forget it (aka “buy and hold”) does not work in a
secular bear market the way it does when you are riding a consistent trend higher.
Also, in recent years index investing has become so popular that we worry indexes may become
subject to greater volatility than in the past. Large institutions utilizing computer-driven trading
programs add to this concern. In short, we fear that indexing may have become a “crowded
trade”.
A final counterpoint to the indexing argument is that certain sectors seem to favor active
management, as do certain market conditions. To quote a white paper Baird recently published
on the subject (available upon request):
Evidence suggests that certain market conditions favor active or passive
management. Actively managed investments have historically performed better
than passively managed investments when the markets are decidedly negative, or
in flat-to-moderate markets. Conversely, passive investments have generally
outperformed in swiftly rising markets.
Believing that the U.S stock market is likely to encounter further struggles in the years ahead, we
feel some degree of active management will be needed. That can come by way of choosing
among indexes, or it can come in the form of active management of individual securities. In our
opinion, it is wise to apply a bit of both.
We find that active management is particularly important in the realm of alternative investments,
a category that is meant to provide low correlation to the stock market. Which brings us to the
subject of diversification.

4. Hyper-Diversification
Let’s start with the problem of diversification, as highlighted by the global economic crisis of
2008: it is hard to come by, especially when it matters most. Globalization is one factor. It used
to be that if you owned stock in American companies, some in Europe, and some in Asia, you
owned a variety of investments that would not tend to dance to the same tune. In the modern age
those economies are more closely linked, each reliant on the other to some degree. An even
bigger concern highlighted in ’08 is that in times of crisis “all correlations go to one” (everything
tends to move in the same direction).
Despite its limitations, we think it is a mistake to underestimate the power of diversification.
First of all, even in the highly correlated economic meltdown, some things performed better than
others. Moreover, when you expand the time horizon diversification still proves to be very
effective. Note the example below, which examines results from 1990-2009:
The Importance of Process
The Average Investor
Lack of a disciplined investment process hinders investment results
Source: “Quantitative Analysis of Investor Behavior” Report, 2010, Dalbar, Inc. (January 1990– December 2009)
This material is for illustrative purposes only and is not meant to represent any specific investment allocation.
1
The Average Equity and Fixed Income Fund Investor returns are based on monthly industry cash flow reports
from the Investment Company Institute.
2
The Average Market Timer return is calculated by subtracting the Systematic Equity Investor return (an
investment made in equal monthly increments for the 20-year period, using S&P 500 performance) from the
Average Equity Fund Investor return.
3
Inflation is based on the U.S. Consumer Price Index.
4
The Diversified Portfolio is represented by the following allocation: 17.5% Russell 1000 ® Growth Index (Large Cap
Growth), 22.5% Russell 1000® Value Index (Large Cap Value), 2.5% Russell 2000® Index (Small Cap), 7.5%
Russell Midcap® Index, 10% MSCI EAFE Index (International stocks) and 40% Barclays US Govt/Credit
Intermediate (Fixed Income securities). The Russell Indices are a trademark of the Frank Russell Company.
Russell® is a trademark of the Frank Russell Company. Indices are unmanaged and one cannot invest directly in an
index. Past performance is no guarantee of future results and diversification does not ensure against loss. All
Risk/Return data is based on a 20-year period ending December 2007.

5. Further, if we accept that the U.S. market may be stingy in the years to come, we have good
reason to seek returns elsewhere. Not knowing exactly where the best returns will be found, we
intend to cast a very wide net, using profits from areas of strength to buy into areas of weakness.
Here are a few examples (in addition to more traditional asset classes):
Global Real Estate
Global Bonds
Currencies
Commodities (oil & gas, precious metals, water, agriculture, etc.)
Long / short strategies
Managed futures
Expectations
There is a price for high levels of diversification: we will not fully participate in a roaring market
in any one particular asset class. If we are wrong about the US market and it proves to be
particularly strong, our heavily diversified portfolios are likely to lag. That is the tradeoff
between risk and reward. If we seek to smooth out performance, to lessen exposure to market
collapses, we will sacrifice participation during extreme spikes to the upside. Believing as we do
that the years ahead may be characterized by elevated risk and muted returns, we view that as a
reasonable price to pay.
There are still big gains to be had by those willing to gamble in the markets, and fortunes will be
made (and lost!), but investors should know that shooting for large returns means putting
principal at greater risk. It is a fundamental and inescapable relationship.
The investment business has traditionally viewed the risk / reward tradeoff from the perspective
of risk tolerance (hence the ubiquitous “risk tolerance questionnaire”). In an upward trending
market this is generally an effective approach. The theory being that if you can tolerate high
levels of volatility you can keep a large proportion of your money in stocks, and achieve big
returns over time. In a secular bear market however, this approach might prove terribly flawed.
Higher stock exposure might not mean higher returns; in fact it could mean quite the opposite.
Just as during difficult markets correlations between asset classes increase, we see increasing
correlation among investors in terms of their appetite for risk, and their investment goals. It
may no longer be as simple as swinging for the fences early in life, and then playing it safe while
in retirement. All investors want to come out ahead, and all want a measure of protection along
the way.
In simple terms we think the appropriate objective right now is to obtain some modest degree of
return above inflation, while striving to minimize volatility in the process. To grow and to
protect (while in many cases drawing income). Those are always the goals, of course, but in a
secular bear market they come into sharper focus. All aspects of investing require greater
scrutiny in a difficult environment.

6. Summary
When it comes to investing we do not claim to have all the answers. In fact, central to our thesis
is a belief that the answers are not entirely available. Rather we have a plan, a process that we
feel is grounded in sound fundamentals. Broad diversification, a focus on costs, constant
research, and continual adaptation to market conditions will be our primary tools of portfolio
construction and management.
As we consider the possibility that we are only part way through a protracted stretch of economic
difficulty, we would do well to remember that there are cycles at work. Each such period of
struggle in the past has been followed by a period of great prosperity. We believe it is the nature
of a free capitalist society in distress to repair, innovate, and grow. While seeking to invest
correctly for the present and foreseeable future, we remind ourselves that we are also trying to
set up for success in the days that lie much further out of view. Time flies… invest accordingly.
____________
The Foley Group
Michael C. Foley Janet G. Kelly Patrick M. Foley, CFP®,QPFC
Senior Vice President Assistant Vice President First Vice President
(215)553-7832 (215)553-7829 (215)553-7821
Visit the Group website:
www.foleywealthmanagement.com
Important Disclosures
Past performance does not guarantee future results. Diversification does not ensure against loss. Any transaction that may
involve the products, services and strategies referred to in this presentation will involve risks, and you could lose your entire
investment or incur substantial loss. The products, services and strategies referred to herein may not be suitable for all investors.
While further diversifying a portfolio with alternative investments can help to reduce risk, this asset class can include higher fees,
greater volatility, higher credit risk, can be more complicated, less transparent, less liquid, less tax friendly, may disappoint in
strong up markets and may not diversify risk in extreme down markets. You should consult with your Financial Advisor prior to
engaging in any transaction described in this communication.
Robert W. Baird & Co. Incorporated