When we began doing business, and perhaps at other times since then, we have had discussions about your risk tolerance. It is a known fact among investment professionals that people frequently overestimate, or underestimate their tolerance for risk in their investments. Risk is also often misunderstood. The reason people misgauge their risk tolerance isn’t as important as it is to recognize that if this describes you, you are not alone.

Recent history provides us with a great teaching moment. Had you invested $10,000 in the Standard & Poors 500, on October 31, 1995, your investment would have grown to $26,099 by August 31, 2000. Not bad for less than five years. But your $26,099 would have been worth $14,020 on September 30, 2002. As of October 31 this year, your investment would be worth $20,757. An average annual return of 7.58% over ten years, but what a ride! And you could still be looking at your high of $26,099 & wonder what happened to over $5,000.

What if you had invested $5,000 in the S&P 500 and $5,000 in the Citigroup Corporate Bond Composite Index? On August 31, 2000 your investment would have been worth $19,629, and on September 30, 2002 it would have been worth $15,549. As of October 2005, you would have $20,553 in your portfolio, for an average annual return of $7.47%.

Does all this mean that everybody should have 50% of their portfolios in fixed income instruments? Not at all. The past ten year is not so much an illustration of the relative performance of stocks and bonds, as it is of the nature of risk. During that time, the stock market when through one of the best, and one of the worst periods in its history. We may never see a scenario like this again in our lifetimes. But if it happened to you, you experienced market risk, big time. If having seen the market returns of the recent past, you had invested in the stock market in early 2000, and needed to withdraw your investment in late 2002, you would have had a serious loss on your hands.

So what is the moral of the story? Actually, there are several. One is that the more time you can leave your investments in the market, the better chance you will have of coming out on the winning side of the equation. Another is that recent history tells you nothing about next week’s market returns. You also need to be realistic about your expectations. Investing with the idea of getting as much growth as possible, means taking as much risk as possible. If that is your goal, the highest return on a dollar invested is found in playing the lottery. You are also almost guaranteed to lose your dollar. Rather than trying to get the best possible return, look at the rate of return you need to obtain in order to achieve your goals. Then evaluate the risks associated with targeting that rate of return and decide whether you are comfortable with the risk, or if you need to adjust your goals.

You can invest with a high degree of confidence in achieving your goals, if you have enough time, invest enough money, and pick your investments appropriately. Keep in mind though, that a high degree of confidence is still not a guarantee.

Investments cannot be made directly in either the S&P 500 or the Citigroup Corporate Bond Composite Index. These indices are used for illustration purposes only and do not represent a specific investment recommendation.

Your Portfolio Monitor account, i.e., the Advisory Account I manage personally, is invested in one of several portfolios. Each portfolio is a different mix of Large-Cap, Mid-Cap, and Small- Cap growth and value investments, as well as World or International, Fixed Income and Real Estate related investments. The mutual funds we select for your account are used to fill one of those asset classes.

Not all mutual fund managers adhere to a strict asset class methodology. Many of those who do not, find themselves invested in a given asset class for extended periods of time, then gradually move into another asset class as market forces convince them to make the shift. This is called style drift, and we have had some as of late.

The two funds we have been using for our Mid-Cap Growth allocation have been the Calamos Growth Fund and the Quaker Strategic Growth Fund. We have moved both of them to join Janus Advisor Forty in the Large Cap Growth allocation. The vacancy in Mid-Cap Growth is being filled with the Hodges Fund.

The Al Frank fund has been sharing duties with the Bjurman Micro-Cap Growth Fund in the Small-Cap Growth asset class. Al Frank has also moved up in market cap and is now job sharing with the Olstein Financial Alert fund in Mid-Cap Value. The Bridgeway Ultra Small Company Market Fund will be used in Small-Cap Growth.

Links enabling you to obtain the prospectus as well as other information about the mutual funds referred to can be found on the links page at RichardDGale.com.