InvestWELL Financial Inc. - Markets This Week

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August 2, 2008 Dear Reader, In July, the market did not move convincingly in either direction. It appears that the fundamentals of the market are improving while the long term picture is still bearish. Our next InvestWELL Report will be released on September 6th, 2008. (following the Labor Report which is generally recognized as a "market mover"). Derek Polcyn, President In This Issue: Investment Idea Quiz Our Results Market Highlights Behavioral Finance Indicators Answer to the Quiz

Investment Idea Question: Is it a good idea to buy international mutual funds in foreign currencies? Answer: Yes. Diversification by currencies is a really good idea if you plan on holding a mutual fund for a long time. In fact, many institutional investors use a 50/50 breakdown. The first 50% is the predictable local currency. The second 50% gives one a chance to benefit from risk reduction due to diversification. In the short run, a single currency effect on portfolio returns could be quite strong (both negative and positive). In the long run, currency movements tend to offset each other, giving rise to benefits of risk reduction.


Quiz What is the main reason for holding different currencies in a portfolio? A) Investors like to have it, since almost all governments allow it B) It gives one bragging rights during parties C) Having foreign currency available for holidays D) Benefits of diversification by currency and risk reduction Answer to the Quiz at the bottom of the newsletter


Our Results (Cumulative %) Investment Strategy – MEMBER SECTION InvestWELL Picks continues to outperform the market (as defined by S&P 500 index.) mainly as a result of a large cash proportion of the portfolio. Chart 1.


Market Highlights During the last month, the US equity market was a classic case of whipsaw (Chart 2 & 3) We believe the market fundamentals are strengthening, yet it is very likely that we are in a long-term bear market. In such a case, it would be too early to start moving back into equities. Charts 2 & 3. S&P 500: 3 Years and Last Month Charts courtesy of StockCharts.com During the last month, the Canadian market was negatively affected by the declining gas prices as well as weakness in financials. (Charts 4 & 5) Charts 4 & 5. TSX Canada: 3 Years and Last Month Charts courtesy of StockCharts.com Last month, the US economy lost 51K jobs while the unemployment rate moved up to 5.7%. This is the seventh straight month of job losses, which many economists view as cost cutting measures on the part of employers. In Canada, the Labor report will be released the following week. We expect that the payroll numbers and unemployment rates will be unchanged overall. In the US, sales of new single-family homes are 33% lower than a year ago. It is interesting to note that new home prices have fallen below those of existing homes in many areas this year. Historically, new homes cost about 5% more than pre-owned homes, but aggressive discounting and incentives by builders during the housing downturn has closed that gap in many markets. Studies have demonstrated that the track record for individual investors is not encouraging. One famous study released in 2003 by DALBAR revealed that over the preceding 19 years, the unmanaged S&P 500 Index earned an average of 12.22% annually. Over that same period, the average equity mutual fund investor earned a paltry 2.57% annually! However, it is important to note that the huge performance differential had little to do with the returns of the average equity mutual fund. The difference is accounted by the fact that investors were unable to manage their own emotions, and moved into funds near market tops while bailing out at market lows. Two-thirds of the Earth's surface is covered by water, but only a fraction of that is potable. While desalinization efforts may help satisfy some of the demand, the increasing population and pollution has made water a very fragile and important resource. It is also important to realize that companies that treat waste water are important because they play a major role in keeping our environment clean and preventing transmittable diseases. Investors may get in on the demand for clean water by investing in this resource. The following are examples of companies that provide water services, wastewater treatment, or make products or provide services that help bring clean water to the market: American Water Works (NYSE:AWK), Aqua America (NYSE:WTR), Veolia Environment SA (NYSE:VE), Flowserve (NYSE:FLS), and California Water Service (NYSE:CWT).


Behavioral Finance Indicators (see explanation) Charts 6 - 8: Advancing/Declining Line, AAII and Equity Put/Call Ratio Charts courtesy of StockCharts.com and DecisionPoint.com

Answer to the Quiz D is correct. Currency diversification allows for risk reduction.

Thank you for reading InvestWELL Report. Invest WELL Financial.com


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